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LECTURE NOTES 



LECTURE NOTES 



ON SOME OF THE 



BUSINESS FEATURES OF 
ENGINEERING PRACTICE 



ALEXC C:> HUMPHREYS, M. E., Sc. D., LL. D. 
President, Stevens Institute of Technolooy 



REVISED AND ENLARGED 



Department of Economics of Engineering 

Stevens Institute of Technology 

Castle Point, Hoboken, N. J. 

1912 






COPYRIGHT, 1913 
BY 

The Stevens Institute of Technology 



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©Ci,A332652 



PREFACE TO FIRST EDITION 

In this department the students are first required to read the 
''Reprints of Lectures and Papers" which were gathered together 
for the purpose of cultivating in them a more sympathetic atti- 
tude of mind towards the specific instruction which is in part 
covered in these lecture notes. 

In writing these notes and in putting them together I have 
made no attempt to avoid repetition, but my aim has been rather 
to consider the same proposition from several points of view in 
the hope that I might so better remove the difficulties that have 
developed in the work of the classroom. 

Experience with three senior classes has convinced me that 
this repeating and paraphrasing is required to enable me to give 
inexperienced students a firm grasp of the essentials included in 
my course, unable as I am, by reason of insufficient time, to 
afford them the advantages of extended practice in examples. 

The actual repetition is far greater than is here indicated, for, 
in my lectures as delivered, I give many additional examples from 
my own experiences, selected to meet the difficulties of the stu- 
dents as these difficulties become apparent. 

I do not hestitate to include commonplaces. My hope is that 
especially where these have to do with the ethics of our noble 
profession the members of my classes will, through a cultivated 
receptivity, come to accept these commonplaces as active and 
controlling truths. 

These pages are placed in the hands of the students so that they 
need not be obliged to rely solely upon my spoken words, but 
may have something to study outside of the classroom in prepara- 
tion for examinations. 

Notwithstanding the fact that I have not been able so far to 
cover by written notes all of the matter included in my course, 
I feel that the students should be able to prepare on all I present 
because much that is most difficult to comprehend is here given 
in permanent form and the remainder I give them full oppor- 
tunity to discuss with me in class. 



vi PREFACE TO FIRST EDITION 

The notes on the Law of Contracts were prepared at my request 
by my friend and counsel, Howard E. White, Esq., of the New 
York Bar, to whom I wish now to repeat my grateful acknowl- 
edgments. 

The commencement address to the Class of 1904, delivered by 
Walter C. Kerr, Esq., would have been included more appro- 
priately in the "Reprints of Lectures and Papers," but as this was 
not feasible I have reprinted it here that Mr. Kerr's sound advice, 
so admirably presented, may be preserved for future classes. 

I hope that I may be able to develop from these and supple- 
mentary notes a text-book on the business features of engineering 
practice, based upon my experiences in the fields of Engineering 
and Business as to the matter, and upon my experiences in the 
classroom as to the most efficient methods to be employed in pre- 
senting this matter to engineer-students already pressed for time 
in which to perform their assigned tasks. 

Alexander C. Humphreys. 

The Stevens Institute of Technology, 
Hoboken, N. J. 



PREFACE TO SECOND EDITION 

In preparing the second edition of my Lecture Notes certain 
additions have been suggested by the experience of the classroom 
and by changes, almost revolutionary, which have taken place in 
the industrial field. 

As explained in the introduction to the first edition, the lectures 
and papers contained in Reprints were collected originally for the 
purpose of cultivating in the students a sympathetic attitude of 
mind toward the more specific instruction to follow. Experience 
in the classroom has shown that these papers can also be usefully 
employed as suggestive material for experience talks. Therefore, 
with the added addresses, they have been included in this volume 
as Part I. 

In Part II I have brought together my own lecture notes which 
appeared originally in the first edition of these Notes and its sev- 
eral supplements. Much of this material has been rearranged to 
bring it into better sequence; and portions have been rewritten 
wholly or in part. 

Considerable new material has been added, particularly on the 
all-important subject of depreciation. 

The necessity for a correct understanding of the many ques- 
tions involved in the complex subject of depreciation has been 
growing in importance more and more each year since my Notes 
were put into print. Then the subject had received far too little 
attention and less real study. Therefore, I was concerned chiefly 
to impress upon our students the necessity for making systematic 
provision on the books of account for the estimated accruing lia- 
bility due to depreciation. While I pointed out that estimates of 
accruing depreciation should be checked and corrected whenever 
opportunity was found to determine the actual accrued deprecia- 
tion, the determination of actual depreciation was not discussed 
specifically. 

To apprehend the difference between estimated accruing depre- 
ciation, to be included as one of the annual charges against in- 
come, and actual depreciation, as found in the appraisal of exist- 
ing plants, has become, in the last few years, a matter of supreme 



viii PREFACE TO SECOND EDITION 

importance in connection with the appraisal of plants for rate- 
making cases. 

Particularly this distinction is of vital importance at the present 
time because many theorists and "Experts," who have had little 
or no practical experience but yet have exercised, and are exercis- 
ing, a strong influence upon public opinion and, still worse, upon 
members of Commissions and Courts, insist upon confusing esti- 
mated accruing depreciation and actual depreciation and therefore 
insist that an existing plant should be depreciated on the basis 
of estimated average life of plant and actual age irrespective of 
the facts as to physical decay, obsolescence and inadequacy deter- 
minable through competent inspection. 

The theorists who fail to thus differentiate between the two 
classes of depreciation also fail to differentiate between actual 
depreciation which may occur most irregularly throughout the 
life of plant, and the scheme of accounting which aims to spread 
uniformly over the years benefited the total depreciation of the 
period. 

Recognizing how increasingly important it is that our engi- 
neers should take the lead in the solution of these questions, I 
have treated separately these two classes of depreciation. 

Also, I have considered more at length than in the first edition 
some of the many questions involved in the practice of compen- 
sating for depreciation by investing the depreciation fund in 
betterments and extensions. 

In Part III I have gathered together a number of special lec- 
tures, some of which have been delivered to our senior classes 
and some of which have been written especially for this volume. 
All of these are intended for use with future classes, following 
the instruction based upon the contents of Part II. 

Mr. Howard E. White's notes on The Law of Contracts and 
The Law of Agency have been used by him for a number of 
years in lecturing to our senior classes and were included in the 
first edition of these Notes. 

Mr. William R. Baird has for a number of years lectured 
to our seniors on Patents and Patent Law, but these lectures were 
first reduced to permanent form for inclusion in this volume. 



PREFACE TO SECOND EDITION ix 

Mr. Edmund Dwight's lecture, Employers' Liability and Work- 
men's Compensation, was delivered for the first time to the Class 
of 1911. 

Mr. H. L. Gantt's lecture, Task and Bonus in Management, 
was delivered a few years ago as a special lecture to our seniors 
and juniors, and is reprinted from the Stevens Indicator of April, 
1908. 

Mr. H. P. Gillette's lecture. Gathering Engineering Cost Data, 
was delivered in 1903, at Columbia University, and is reprinted 
by permission from the July, 1904, issue of the "School of Mines 
Quarterly." 

Other lectures, written expressly for this volume, are as 
follows : 

Accidents to Employees and Liability Therefor, by Mr. Louis 
L. Babcock. 

Costs, by Mr. J. Newton Gunn. 

An Analysis of Work, by Dean Herman Schneider. 

I am also permitted to include three addresses on Banking by 
Mr. Frank A. Vanderlip. 

I avail myself of this opportunity to renew the expression of 
my obligation to those who contributed to the Reprints and the 
first edition of these Notes and to extend my sincere thanks to 
those who have contributed additional matter for this edition. 

In general, while in revising these Notes I have aimed to make 
them more complete and more convenient for use in the class- 
room, I have not attempted to produce a concisely worded text- 
book. My experience in the classroom has failed to persuade me 
that all repetition should be eliminated. 

I wish to thank most sincerely Dr. F. L. Sevenoak for the 
assistance he has so ungrudgingly given me in carrying this book 
through the press. 

Alexander C. Humphreys. 

Stevens Institute of Technology, 
Castle Point, Hoboken, N. J. 
1912. 



^ 



CONTENTS 

PART I 
Reprints of Special Lectures, Papers, and Addresses 

Introduction 3 

Is a Knowledge of Business Methods of Importance to the Engineer? 5 
President Humphreys. 

Experience Teaching 16 

Henry de B. Parsons, B.Sc, M.E., Consulting Engineer. 

Accounts and Accounting 20 

George R. Turnbull, Vice-President, Guaranty Trust Company of 
New York. 
The Relation of Money and Banking to Engineering Work .... 29 

William Sherrer, Manager, New York Clearing House. 
Should the Stevens Curriculum Include Instruction in Bookkeeping 

and Accounting? 39 

President Humphreys. 

Business Training for the Engineer 48 

President Humphreys. 
Factory Depreciation — The Problem of Correct Valuation .... 53 
Ewing Matheson, C.E., M.I.C.E., Consulting Engineer. 

The Commercial Side of Engineering 61 

Walter M. McFarland, Formerly Chief Engineer, U. S. Navy; 
Vice-President, Westinghouse Electric Co. 

Commencement Address to the Class of 1903 79 

Charles F. Scott, A.B., A.M., Professor, Electrical Engineering, 
Sheffield Scientific School, Yale University. 

Commencement Address to the Class of 1904 88 

Walter C. Kerr, B.M.E., President, Westinghouse, Church, Kerr 
&Co. 

Commencement Address to the Class of 1905 97 

Palmer C. Ricketts, C.E., E.D., President, Rensselaer Polytech- 
nic Institute. 

Commencement Address to the Class of 1906 106 

John Hays Hammond, M.A., E.D., Mining Engineer. 

Commencement Address to the Class of 1907 114 

Paul Morton, President, Equitable Life Assurance Society of 
New York. 



xii CONTENTS 

Commencement Address to the Class of 1908 120 

Henr}^ S. Pritchett, Sc.D., LL.D., President, Carnegie Founda- 
tion for the Advancement of Teaching. 

Commencement Address to the Class of 1909 126 

Julian Kennedy, B.S., A.M., E.D., Consulting Engineer. 

Commencement Address to the Class of 1910 137 

Walter M. McFarland, Formerly Chief Engineer, U. S. Navy; 
Manager, Marine Department, Babcock & Wilcox Co. 

Commencement Address to the Class of 1911 150 

Robert M. Thompson, President, U. S. Naval Academy Alumni 
Association; President, Orford Copper Co., and Chairman, 
Board International Nickel Co. 



PART II 

Lecture Notes on Some of the Business Features of 
Engineering Practice 

President Humphreys 

In General 157 

Accountancy — General Principles 168 

Accountancy — Methods •. 183 

Accountancy — Classification of Transactions and Grouping of Accounts 203 

Accountancy — Advance Payments and Accrued Expenses .... 219 

Accountancy — Analysis of a Balance Sheet , 237 

•Depreciation — Theoretical or Estimated Accruing Depreciation . . 258 

'Depreciation — Actual Depreciation 303 

' Depreciation — The Accountancy of Depreciation 318 

Analysis of Data 349 

Specifications, Estimates, Contracts, and Appraisals 359 



PART III 

Special Lectures 

Notes on the Law of Contracts 379 

Howard E. White, Esq., Member of the New York Bar. 

Notes on the Law of Agency 411 

Howard E. White, Esq., Member of the New York Bar. 



CONTENTS xiii 

Patents and Patent Law 420 

William Raimond Baird, M.E., LL.B., Specialist in Patent Law. 

Employers' Liability and Workmen's Compensation 444 

Edmund Dwight, Esq., Resident Manager, The Employers' Lia- 
bility Assurance Corporation, Ltd. 

Accidents to Employees and Liability Therefor 456 

Louis L. Babcock, Esq., Member of New York Bar. 

Gathering Engineering Cost Data 473 

Halbert P. Gillette, E.M., Consulting Engineer and Editor. 

Task and Bonus in Management 485 

H. L. Gantt, M.E., Efficiency Engineer. 

Costs 498 

J. Newton Gunn, Esq., President, Gunn, Richards & Company, 
Production Engineers. 

An Analysis of Work 510 

Herman Schneider, B.S., Dean, College of Engineering, Univer- 
sity of Cincinnati. 

What is a Bank? 521 

Frank A. Vanderlip, Esq., President, The National City Bank of 
New York. 

Story of National Banks 536 

Frank A. Vanderlip, Esq., President, The National City Bank of 
New York. 

Safeguards Against Panics 550 

Frank A. Vanderlip, Esq., President, The National City Bank of 
New York. 



Part I 

REPRINTS OF SPECIAL LECTURES, PAPERS AND 

ADDRESSES 



INTRODUCTION 

Alex. C. Humphreys of the Class of '81 of Stevens Institute 
of Technology, and H. de B. Parsons of the Class of '84, previous 
to 1897 combined in suggesting that, as far as time would permit, 
instruction should be given, at least to the members of the Senior 
Class, on commercial conditions and methods affecting engineer- 
ing enterprises. 

The result of these suggestions was that a course of four lec- 
tures was delivered to the Senior Class in the spring of 1897. 
The first lecture was prepared by Mr. Humphreys and the second 
by Mr. Parsons. Mr. Humphreys was prevented by illness from 
delivering his lecture, so it was delivered by Mr. Parsons on the 
same day that he delivered his own. The following day Mr. 
George R. Turnbull, vice-president of the Guaranty Trust Com- 
pany of New York, gave a lecture on "Accounts and Account- 
ing"; and two days later Mr. William Sherrer, manager of the 
New York Clearing House, gave his lecture on "The Relation 
of Money and Banking to Engineering Work." 

During the next college year it was not found practicable to 
provide regular instruction along the lines suggested, but a brief 
course in accountancy was offered to the Senior Class in the 
spring of 1899, as explained in the paper by Mr. Humphreys, 
entitled, "Should the Stevens Curriculum include Instruction in 
Bookkeeping and Accounting?" 

When Mr. Humphreys assumed the presidency of Stevens 
Institute, he promptly determined to enlarge the scope of this 
instruction and, as a result, the Department of Business Engi- 
neering was established under his direct supervision; the title 
of the department being later changed to "Economics of Engi- 
neering." 

In addition to the four lectures or talks above named, the 
pamphlet entitled "Reprints of Lectures and Papers" contained, 
as originally published, the following four articles : 

"Should the Stevens Curriculum include Instruction in Bookkeeping and 
Accounting?" by Alex. C. Humphreys, reprinted from the Stevens 
Indicator. 



4 LECTURE NOTES 

"Business Training for the Engineer," by the same author, reprinted 
from Cassier's Magazine. 

"Factory Depreciation," by Ewing Matheson, reprinted from Cassier's 
Magazine. 

"The Commercial Side of Engineering," by Walter M. McFarland, 
reprinted from Cassier's Magazine. 

There are now added to this group of lectures and papers the 
addresses delivered to the graduating classes of Stevens Institute 
of Technology from 1903-1911 : one of these by Walter C. Kerr 
was included in the first edition of "Lecture Notes." 



IS A KNOWLEDGE OF BUSINESS METHODS OF 
IMPORTANCE TO THE ENGINEER? 

By 

Alexander C. Humphreys 

With many of us who are engineers and with some of us who 
are graduates of Stevens this question hardly admits of discus- 
sion. Our professional and business lives have demonstrated to 
us practically and completely that the engineer who aims to be 
more than a mere subordinate should be acquainted at least with 
the methods ordinarily pursued in business life and that even to 
the subordinate such a knowledge is of importance. 

But on the other hand there are many who will tell you that 
the engineer is above the necessity for such an addition to his 
curriculum; that he can, if necessary, hire his bookkeeper and 
his business manager for a moderate compensation, and much to 
the same effect. 

My experience goes to show that the men who thus argue 
are liable to wind up by being hired at a moderate salary by 
the business manager. 

A number of us who are Alumni of Stevens have for some 
time felt that it might be of considerable importance to the stu- 
dents, yet to start out in life, if they could by some means be im- 
pressed with the importance of a knowledge of business methods. 

Mr. H. de B. Parsons, Stevens '84, the late president of the 
Alumni Association, made this idea a prominent feature of his 
presidential address last year ; and to him we are largely indebted 
for bringing the present plan to a trial. 

We have all appreciated that the Stevens Course is a most 
severe one and that it should not be unadvisedly added to, but 
we have thought that something could be done by means of a 
short course of lectures, which, if appreciated by the students, 
would be really useful to them. 



6 LECTURE NOTES 

President Morton has from the time of the first suggestion 
encouraged the making of the trial, and I doubt not that his own 
experience as a successful man of affairs has argued with him in 
favor of the new departure. 

It cannot be expected that through the medium of a few 
lectures you can become competent bankers, merchants or even 
accountants, but it may be expected that even these will be 
sufficient to impress upon some of you at least that a knowledge 
of business methods is of importance to the engineer and to 
teach you the underlying principles involved. If, with your co- 
operation, we can accomplish this much, we shall feel well 
satisfied. 

My experience as an employer of technical men, most of 
them graduates of Stevens, has taught me that many, even of 
the more sensible ones, the ones best endowed with common 
sense, have at first failed to appreciate that there was anything 
in connection with business methods which demanded their re- 
spect. This has been the weakness with a number of otherwise 
strong men. It has been their inability or reluctance to learn 
in this direction which has a number of times necessarily pre- 
vented them from obtaining promotions which otherwise they 
had earned. I could, if I thought it desirable, give a number of 
cases which would drive home this part of my argument. 

A friend of mine was recently talking to me on this subject. 
He is a capitalist and a large employer of labor of various grades. 
He spoke of Stevens graduates as being in his experience excel- 
lent men after they had been out of college about three years; 
that it took about that long for them to get over the feeling that 
they occupied a lofty plane as compared with the business man, 
and to appreciate that it was necessary they should learn some 
things from the business man if they wished to fill positions of 
responsibility. 

Another, and an intimate friend, who is one of the best- 
balanced men that I know, a practical engineer, a remarkably 
strong man in business and financial affairs, a man who though 
self-educated is well educated, and who has a profound respect 
for a technical education, says that he is continually disappointed 



A KNOWLEDGE OF BUSINESS METHODS 7 

that he cannot promote his technical men as rapidly as he desires 
and the reason is that they are lacking as business managers. 

Another friend, a graduate of Rensselaer Polytechnic, and now 
occupying a position of great responsibility, having worked up 
from the practical side of his business, told me recently that there 
was no part of his course which, in looking back through his 
experiences, he felt had been so distinctly of benefit to him as 
some extra lectures on contracts and the law of contracts to which 
he had listened at the end of his course. I may not be pre- 
pared to go so far, but it may serve a purpose to show how 
strongly some successful practical engineers feel on this subject. 
This friend was most emphatic in the expression of the opinion 
that the technically educated men who had been the most suc- 
cessful under him were those who were able to see quickly 
that there was something beside the technical side of an edu- 
cation and that it was also necessary to be practical, systematic, 
business-like, familiar with the requirements of business life, and 
conscientious. 

Probably the most important engineering society in the world 
is the British Institution of Civil Engineers. In its diploma or 
certificate of membership appears the following: 

"A society established for the general advancement of mechanical 
science and more particularly for promoting the acquisition of that species 
of knowledge which constitutes the profession of a civil engineer, being 
the art of directing the great sources of power in nature for the use and 
convenience of man." 

This statement shows clearly that ours is an eminently prac- 
tical profession. We may be interested in science for science's 
sake, but that is not so in our capacity as engineers. In that 
capacity, we are, as a rule, simply called upon to apply the laws 
as already determined and laid down for us. We are to direct 
the great sources of power in nature for the use and convenience 
of man. A moment's thought shows how complete, for success, 
must be that harmony between theory and practice, so beauti- 
fully set out by Rankine in the preface to his Applied Mechanics ; 
and this harmony of theory and practice must include harmony 
with the practice of the business world. 



8 LECTURE NOTES 

How are the great sources of power in nature to be directed, 
except by the employment of capital ? And how is capital to be 
employed in connection with engineering work except in con- 
formity with the regular methods employed in commercial life? 
Shall we alone refuse to accord respect to these methods and de- 
clare that commercial practice shall bend to our whims? Even 
then, some other methods must be substituted, and can we for a 
moment assume that the methods we would substitute would be 
generally preferable to those developed by specialists in that 
line through centuries of experience? 

To me it seems absurd that any argument should be needed 
to enforce this simple point, but as I have said, experience has 
shown too fully the necessity for awakening technical men to 
their general weakness in this direction. 

If I cannot by my arguments convince you that it is im- 
portant to keep an open mind in this connection, then let me ask 
you to take it from me on faith. One or two have done this in 
the past, and they have been glad to come to me in later years 
and acknowledge that the faith was not misplaced. 

I believe every man should have some knowledge of business 
methods, if only for his own protection; though I acknowledge, 
in the case of certain specialists, this necessity does not at once 
seem to be apparent, as, for instance, with ministers, chemists, 
physicians, dentists, etc. Even with the men of these professions 
the world would be benefited greatly if they were more business- 
like. It is for you to remember you are not a specialist in this 
same sense, for our profession is eminently practical and cannot 
be isolated from its commercial associations. 

If I am right, and a knowledge of business methods tends to 
make your educational equipment more complete and more prac- 
tical, you cannot, in this age of tremendous competition, afford 
to neglect this branch of knowledge. Bear in mind that the con- 
ditions surrounding capital and labor have changed greatly in the 
last twenty years, yes, in the last five years. Year by year it is 
getting harder to secure a fair return upon money invested. In 
the United States, many successes in the past have been secured 
only because the conditions permitted wasteful methods. These 



A KNOWLEDGE OF BUSINESS METHODS 9 

successes under conditions more nearly normal might well have 
been dire failures. Think for a moment of the effect of building 
up in this country about 183,000 miles of railroad in about a half 
a century. That means, in a certain sense, a fictitious activity in 
many departments of industry, brought about by the spending of 
large sums of capital, chiefly foreign, brought out for investment. 
And now we have to pay the interest on this capital, and to help 
us in this, we are never again to have such a vast amount of work 
of development bringing in its train what is popularly known as 
''good times." This means that it will be harder to secure em- 
ployment and harder to secure adequate compensation therefor. 
It also means that more and more must capital be husbanded. 
This all means, then, that in our work as engineers, the cents 
must be watched and accounted for. How is this to be done 
surely unless we are familiar with the methods employed in the 
financial world, and especially familiar with correct methods of 
accounting? 

The engineer of to-day must be able to obtain not only good 
results in construction and in operation, but he must be able to 
record those results so that they can be completely analyzed and 
compared. It is to be noted that the man who does so record 
and analyze his results is seldom an extravagant constructor or 
operator. 

Making some such argument as this to a friend of mine, a 
Stevens graduate and a successful man, he replied to the effect 
that there was no necessity for his bothering his head about such 
matters, as he could hire a bookkeeper for ten dollars a week to 
do such work for him. The kind of bookkeeping you can secure 
at ten dollars a week is not the kind I am talking about. I do 
not urge you to acquire facility in posting a ledger and in footing 
up long and wide columns of figures, but I am urging you to 
acquire an understanding of the underlying principles of account- 
ing. 

You do not go to Stevens Institute to become a mechanic, 
and still the course includes shop work. You aim by the com- 
bination of practical and theoretical training to become com- 
petent to direct mechanics intelligently. By such powers of direc- 



10 LECTURE NOTES 

tion you expect to be more valuable to your employer than the 
mechanic, even though the mechanic can earn at the bench better 
wages than you can. 

This all applies to the case of the bookkeeper. 

Because you may fail to compete with the mechanic in facil- 
ity of execution is no reason why the shop course of Stevens 
should be abandoned, and because you cannot spare the time and 
effort to acquire great facility in the keeping of books, does not 
argue that you should not acquire a knowledge of the principles 
involved. 

I have always felt that the responsibility of the engineer in 
this respect is greatly increased by reason of his mathematical 
training. With this training he should have no difficulty in 
easily mastering the principles of double entry bookkeeping, for 
the system is logical and consistent. A man who has gone 
through the higher mathematics should be ashamed to confess 
that there are any terrors for him in double entry bookkeeping. 
The trouble is, of course, that at the beginning the engineer 
often fails to appreciate the value of this knowledge, and then 
later he is fully employed or lazy, and not knowing how to go to 
work, he pushes the matter to one side. 

Let us suppose for an instant that you are called upon to ex- 
amine into the value of a manufacturing property. Say that in 
connection with the examination there are presented to you a 
ledger trial balance, a profit and loss statement and a statement of 
assets and liabilities. It goes without saying that you should be 
able to understand these statements. Can you be sure of doing 
so without a knowledge of accounting by the double entry 
system? I speak of this system especially because it is the one 
almost universally employed in important business undertakings 
and it is the only system which can be employed safely by reason 
of the fact that if an error creeps in, probably no balance can be 
obtained and so the error is detected, which is not the case with 
the single entry system. 

Returning to the question of the examination, you may reply 
that you can employ an accountant to make this part of the 
examination. Very true, you may do so in any case, but it would 



A KNOWLEDGE OF BUSINESS METHODS 11 

still be necessary that you should understand the principles 
involved in the accounting, or it would be necessary that your 
accountant should understand much of the technical and practical 
part of the business, for without such a knowledge he could not 
be sure that the accounts were properly classified, and unless 
they were so the statements furnished would be valueless. I have 
repeatedly had experience of this kind. I have many times found 
the books of a concern so kept by the bookkeeper, the practical 
head of the concern being either ignorant or indifferent, that the 
profits were more or less erroneously stated, and this generally 
because items had been carried into construction accounts which 
should have been carried into operating accounts, 

I could cite a number of most striking cases of this kind; in 
some of them it would have been difficult, to say the least, for an 
accountant to have discovered the errors unless he was specially 
trained in the particular business under examination. I have 
been engaged in some such cases where it has taken days, weeks, 
yes, even months, to get the accounts so straightened out that a 
completely accurate statement of results could be obtained. 

Now it is to prevent just such a state of affairs as this and to 
enable you to detect it when it exists, that you should understand 
accounting. 

Do not fail to recognize at once the importance of classifying 
carefully all receipts and expenditures. 

It is the balancing of the operating accounts which at the 
end of the year determines whether you have made a profit or a 
loss by the year's operations. 

If, now, you have improperly charged certain expenditures to 
construction or investment accounts, you have falsely increased 
the statement of your profits. If you draw this fictitious profit, 
you are really drawing upon your capital ; if this is continued, it 
is not hard to say what must be the end. It is then of the utmost 
importance that the accounts should be competently and honestly 
classified. 

This sounds simple enough. Let me assure you that in some 
cases it is extremely difficult to secure the desired result. 

Let me give you a leaf from my own experience. I had under 



12 LECTURE NOTES 

my charge about forty gas works, and it was of course most 
desirable that the results should be compared carefully in the 
interest of economy; we finally secured a very complete system 
of united management. The same general business methods 
were employed at all the stations, the same system of classifica- 
tion was employed, and this was carefully displayed for the in- 
struction of all by means of detailed charts and instructions. The 
vouchers were carefully checked up, month by month, at the 
home office. Systematic audits were periodically made by a trained 
corps of auditors. The superintendents and managers met me 
once a year to discuss results and the records of the same. And 
still, notwithstanding all this, we found that if the comparisons 
were to be conclusive they often had to be made while carefully 
bearing in mind all modifying conditions. Think, then, how 
difficult it may be to make comparisons between results obtained 
by concerns not working under a united and uniform system of 
management. Especially is it hard at times to distinguish fairly 
between charges to repairs and to extensions or improvements. 
Often construction is designed to replace plant which has been 
worn out in service. Here, then, care has to be exercised that the 
operating accounts are charged with their full share of the 
renewal and that the betterment or investment account is not 
called upon to bear more than its share of the load, thus impair- 
ing capital. 

Those familiar with business methods will tell you that in this 
lies the pitfall which has ruined many a good business. In this 
direction may we look for the fault which in the past led to the 
reorganization of so many American railroads ; over-capitalization 
in the first place, and later, repairs and renewals charged to con- 
struction accounts. 

Some will say that it needs no special business methods or 
knowledge of accounting to know all I have now said; it only 
requires common sense. Very true, if the common sense is suffi- 
ciently developed. It will do no harm to point out, in any case, 
that your common sense has to be exercised in this direction, and 
then if you think that your common sense is not sufficiently 
developed, you may be correspondingly the more on the alert. 



A KNOWLEDGE OF BUSINESS METHODS 13 

As a rule, as I have before indicated, my experience goes to 
show that technical graduates find their common sense lying so 
dormant in this direction that they refuse to believe there is any- 
thing here which demands their attention or their respect. 

The proper charging up of the ordinary cash repairs and 
simple renewals, offers no difficulty. The cash as paid out will be 
charged to its proper repair account and it will be found at the 
end of the year in its proper place in the statement of profit and 
loss. But there are more complicated items. I have already 
referred to one, where the repair item is combined with one of 
improvement. You cannot be too careful in avoiding trouble 
here. 

But there are repairs, or rather renewals, which have to be 
made at longer intervals, and the cost of which cannot fairly be 
placed upon one year's business. Means should be taken to arrive 
at as accurate an estimate as is possible of the life of this part of 
the plant, and year by year a sufficient sum should be written up 
to a deferred repair or renewal account, so that when this part 
of the plant does have to be renewed, the funds will be ready for 
the expenditures and they will not have been paid out in divi- 
dends, owing to misleading statements of profit and loss. 

This points to the necessity for providing in your scheme of 
operation and accounting for the renewal of the entire plant at 
the assumed expiration of the terms of life of its several members. 

But, you may say, surely an engineer may be able to design 
a good engine, or bridge, or roof, without a knowledge of all 
these matters. Possibly so in a subordinate capacity. But if this 
engine, or bridge, or roof is to be sold in competition, as it must 
be sooner or later, then the designer must also keep in mind 
that a minimum of cost must be combined with a maximum of 
efficiency. This means that every part of the work must be fol- 
lowed through the shop from tool to tool, and the whole carefully 
classified for future analysis and comparison. 

And this brings us to another most important branch of our 
subject: 

Shop accounts and their proper classification. 

Before we can fix a price on an article to be sold, we should 



14 • LECTURE NOTES 

know its cost. But this is hard to determine unless our shop 
accounts are kept accurately. I venture the assertion that in many 
of our large establishments only general results are known, and 
that for want of accurate, itemized costs some of the articles 
sold are sold at a loss and some of them are sold at a price corre- 
spondingly too high. This is not good business and must finally 
place those practicing it at a disadvantage with more competent 
competitors. 

The shop cost must include not only cost of material and labor, 
but cost of tools and general wear and tear. And beyond shop 
cost, by means of a percentage charge or otherwise, each manu- 
factured piece must bear its pro rata share of general expense 
and management, including that of the sales department. 

This is a subject which should appeal to you at once, and 
therefore I may omit further reference to it, except to say that 
we had expected to provide for one lecture on this subject of 
shop accounting. We had hoped that either Mr. Frederick W. 
Taylor, of Stevens, '83, or Mr. H. R. Towne would have taken 
up the subject, but unfortunately, they were both unable to 
undertake the work this year. At the time of writing these 
notes, I am not yet informed whether other provision can be 
made. If not for this year, we shall hope to see the plan carried 
through next year. 

We have been fortunate in arranging for a lecture by Mr. 
G. R. Turnbull, vice-president of the Guaranty Trust Company 
of New York, who will lecture to you upon the subject of double 
entry bookkeeping, accounting and office methods. We are 
fortunate in securing the services of a man so eminent in his 
vocation. Let me urge you to absorb fully what Mr. Turnbull 
will say. Part of it, I imagine, will be so concise, yet so full of 
meaning, that you may fail to take it in. Let me assure you that 
you are fortunate in getting your first lessons on this important 
subject from such a source. I wish that I had been so fortunate. 
My first experiences were through the medium of unaided com- 
mon sense, and the experiences were unnecessarily severe. 

Following Mr. Turnbull, Mr. William Sherrer, manager of 
the New York Clearing House, will give you a lecture on Bank- 



A KNOWLEDGE OF BUSINESS METHODS IS 

ing and Business Methods. Here again we are to be congratu- 
lated that the manager of this great financial institution has con- 
sented so generously to aid us in this important work. I only 
hope that we may afterwards be able to tell these gentlemen that 
their unselfish efforts in our behalf have been appreciated. 

In conclusion, let me repeat, that in my opinion an engineer, 
to be truly successful, must be more than a narrow specialist. 
He must have the special training, but he must have also the 
broader and more general training which comes from contact 
with the world and with things commercial. 

Especially remember that the engineer is a man of practice. 
It is for him to apply knowledge. In his profession it is better 
that he should have a limited, if thorough, special training and a 
large capacity for the application of that training, combined with 
breadth outside of this special line, than that he should have a 
great store of knowledge without the ability to apply it practi- 
cally. Do not imagine that I am depreciating profound and wide 
engineering knowledge. Lucky the man who combines such 
store of knowledge with the ability to use it for the benefit of 
the world and of himself. 

But if I cannot have that combination, I prefer the limited 
amount of knowledge combined with the ability to apply it effi- 
ciently. Such a man can do thorough, conscientious, good work, 
and if he carries on his work in conformity with correct business 
methods, he can, while doing some good for the world in general, 
do some good also for himself in particular. 



EXPERIENCE TEACHING 

By 
Harry de B. Parsons 

In order that you may fully appreciate these lectures on 
"Business Methods," it is necessary that you should have a clear 
conception of their object. It is intended that they shall open up 
before your minds a vista into the future walks of your profes- 
sional careers, and for those among you who are quick to per- 
ceive, they will no doubt help to smooth over many difficulties 
to be encountered on the practical side of life. 

While not making you experts in any branch, they will bring 
to your attention such business subjects as are common to us 
all ; and will widen out your spheres of thought, so that you may 
be the better fitted to enter, a few months hence, into the real 
competition of the world. 

Among the many requisites that are essential to the man of 
business may be mentioned the following: 

Always give great credit to the talent of others, and never 
underestimate their ability. It is thus well to believe that your 
competitor is always stronger than yourself, and that in order to 
achieve success you must do your best. 

Be brief, clear and concise in your conversations and writings. 

Be decided and have an opinion of your own. Do not qualify 
your views with such expressions as "if," "I guess," "I fancy," 
as they weaken your standing in the minds of your hearers. 

When discussing professional topics with others, remember 
that as a rule you are better posted than they about your side of 
the subject, and that a clear and unequivocal expression of facts 
on your part will carry great conviction. 

Should you make an error, never hesitate to acknowledge it, as 
a manly admission never hurt a man so much as his efforts to 
cover over the mistake. 

Train yourself to take broad views of all subjects, and do not 
allow your ideas to be cramped by details. Study schemes, 



EXPERIENCE TEACHING 17 

whether projected or finished, in their entirety, remembering that 
when perfected the details can be worked out afterward. 

The engineer of to-day must design his work not alone for its 
practicability, but also for its adaptability. The plan must be 
well adapted to suit surrounding and possible future conditions. 
This results in the fact that the most potent arguments for or 
against a project are those which arise from the business rather 
than from the professional standpoint. Some years ago when 
the British Government decided to supply its army, about to 
advance into the Soudan for the relief of General Gordon at 
Khartoum, with water pumped from the coast, it was decided to 
award the contract for the pumps to an American manufacturer. 
In reply to the criticisms put forward by the home makers, the 
government engineers replied that their decision was based on the 
fact that the concern in question was the only one which had 
actually built pumps for a similar service, and that they had no 
time for experiment or trial of other forms. This decision was 
based on purely business grounds, while the professional part of 
the problem did not enter at all. 

The province of the engineer has become so amplified as to 
include professional advice in many business councils. The capi- 
talist is not satisfied with the answer to "What will it cost?" but 
demands a reply to "Will it pay?" While the first query is of 
purely professional character, the second is founded entirely on 
business considerations. In short, the work must be so planned 
that the interest on the cost added to maintenance and operating 
charges must be less than the receipts. As an illustration I have 
in mind a certain scheme which was excellent, per se, since there 
was an established trade. It became necessary to build a new 
structure to replace the old, and the professional men retained so 
ignored the business considerations of the problem as to reduce 
the company to a state of bankruptcy. Their purely professional 
work was no doubt well done, but so needlessly costly as to pro- 
duce dire results through the enormous interest charges involved. 
A miscarriage in business judgment is just as damaging to one's 
reputation as a professional failure. 

Remember that "money makes money" and that great consoli- 



18 LECTURE NOTES 

dations appear to be the order of the day. In order to insure 
success, these combinations must be thoroughly "business-hke" 
in all details of management, which applies, in no minor degree, 
to the allied work of the engineer. 

Since the capitalist stands as owner, he must be always the 
master, while the professional man remains as servant, because he 
acts in the capacity of assistant to carry out the former's views. 
Furthermore, the greater the position of responsibility, the more 
does the engineer's time become engrossed with business matters 
and the wider does he depart from his purely professional work. 

In all operations, the legal questions that are involved, directly 
or indirectly, must be treated as omnipotent. Under such con- 
ditions money is well spent in advance to secure the best opinions. 
As nothing in this world is too good to use, do not hesitate to 
secure the best advice, and never rest content with that which is 
commonly called "good enough." 

The subject of ''Laws of Contract" is but one branch of legal 
work, and yet is sufficiently extended as to occupy the life study 
of some of our most noted lawyers. Do not then imagine that 
you can become contract lawyers and at the same time keep pace 
with the developments of your own profession. Each different 
state has its own laws, and this fact complicates the problem to 
such an extent as to warrant your retaining a good lawyer to 
assist in drawing up the contract clauses to be attached to your 
specifications. Bear in mind that the courts interpret what you 
may write. You can call for any conditions that you please, but 
if the ruling of the courts be adverse, the actual meaning may be 
just contrary to your intentions. One of the most absurd as well 
as dangerous positions in which a man can place himself is that of 
a "know all." No man can expect to be well posted on every- 
thing. It is an absolute impossibility to know it all. 

All such engineering work as the study of general plans for 
large enterprises, valuations, examinations and reports, places the 
engineer in the closest contact with the capitalist. It is, therefore, 
highly essential to have a knowledge of the principles involved in 
business methods, including bookkeeping and accounting. It is 
often the case that the engineer can make a success out of failure 



EXPERIENCE TEACHING 19 

through his professional experience coupled with his business 
knowledge. 

Above all things be true to yourself and be honest in your con- 
victions. Do not assume responsibilty which does not belong to 
you, but be ready to answer for your subordinates. A man who 
is not true to himself, cannot and must not expect the respect of 
the world. 



ACCOUNTS AND ACCOUNTING 

By 

George R. Turnbull 

In my endeavor to supplement the able address on "Is a 
Knowledge of Business Methods of Importance to the Engineer ?" 
given by your Mr. Humphreys, I will, as far as the brief limits 
of time permit, present to your attention the importance of 
accounts and accounting as one of the leading features of a 
business education. 

In primitive times, when "swopping" or bartering was the only 
method of trading, the necessity for accounts was not felt, and 
bookkeepers were not in demand. But when trading became 
further advanced, when barter through the medium of traders 
took the place of barter direct, when things were represented by 
money prices and values, it then became necessary to keep some 
kind of a record of the transactions and the amounts involved. 
And here I would suggest a thought for your consideration, and 
it is — that barter is as absolute to-day through the medium of a 
merchant and by the use of money as when commodities were 
passed from hand to hand ; and following out this idea practically 
and logically, you will arrive at the conclusion that money does 
not make prices, for the reason that no one will continue to 
produce crops or wares which do not finally give a satisfactory 
return in the things he is accustomed to receive in exchange, or, 
to put it in the language of the day, we cease to follow any busi- 
ness or vocation that "does not pay." 

When our transactions are few and far between, we may trust 
to memory. I have known men who carried their business in 
their heads, but it is a great waste of effort and brain to place 
such a tax on memory, and memory, however good, cannot be 
relied upon to recall all the facts, dates and figures involved in 
numerous transactions, hence recourse to a record of some kind 
becomes a necessity. 

Any one can put down a statement of the bare facts involved in 
a transaction that will serve to refresh the memory in regard to 



ACCOUNTS AND ACCOUNTING 21 

it, but when the transactions are of any importance, it becomes 
absolutely necessary to go further, and the record must show not 
only our original possessions and the dispositions made of them, 
but our exact relations at any given time to those with whom we 
trade and have dealings, especially where credit is involved. This 
suggests the need of some systematic method for arriving at these 
results, and what is known as single entry bookkeeping is the first 
outcome. The first step in this system is to enter simple state- 
ments such as the following : 

That we have bought certain things from a certain person at a 
certain price, to be paid for at a certain time ; or 

That we have sold and delivered certain of our goods or prop- 
erty for a certain price, payable at a certain time ; or 

That we have received cash payment for goods delivered; or 
That we have paid a certain party for goods received ; or 
That we have received the written promise to pay of a debtor 
in settlement of an amount due us (which promises are in book- 
keeping known as bills or notes receivable) ; or 

That we have delivered our own promise to pay for value 
received (known as bills payable) ; or 

In the event of an exchange, as often happens in real estate 
transactions, a record of the exchange made, with a description of 
the properties ; or 

That we have paid not for goods but for services, for rents, 
for interest, or expenses of any kind; or 
That we have received payment for services, rents, etc. 
These are all natural entries suggested by the facts in the case, 
and these entries (known as original entries) are the ground- 
work of all systems of bookkeeping and are of the utmost im- 
portance, because they are the only entries recognized as evidence 
in proceedings at law. And, in this connection, I want to empha- 
size the importance of making original entries so complete that 
ever after the transaction may be as readily understood from the 
entry as when it was actually made. Nine tenths of the trouble 
with bookkeepers arises from the incomplete and careless manner 
in which first or original entries are made. Brevity may be the 
soul of wit, but it is frequently the confusion of accounts. 



22 LECTURE NOTES 

These entries, with the exception of matters pertaining to cash, 
are usually entered in what is called the day-book. Cash items 
are usually entered in a book known as the cash-book, which is 
simply a subdivision of the day-book used because of the more 
convenient determination of funds on hand. 

In both single and double entry bookkeeping, the ledger 
accounts are headed with the names of the parties with whom 
transactions are had, and also such impersonal accounts as mer- 
chandise, cash, bills receivable, bills payable, expense and sub- 
divisions thereof, and others according to the character of the 
business, and from the day-book and cash-book are transcribed 
into the ledger the amounts involved in the various transactions. 
This is called ''posting." 

Now, it must be very apparent to you that the omission of an 
entry, or the failure to transcribe an entry into the ledger, opens 
the door to loss and error. This cannot happen without discovery 
in cash transactions, because the cash is usually footed and proved, 
and the balance, if it does not prove, evidences the failure to make 
an entry, an error in making one, or a mistake in handling the 
money. This method (single entry) is the one that commonly 
obtains among retailers and petty tradesmen, and though it is 
called "single entry," I am sorry to say that an examination of 
tradesmen's bills sometimes leads to a belief that they possess 
some latent knowledge of double entry. 

Because of the grave probability of error and great possibility 
of fraud, single entry bookkeeping, even in its best form, is un- 
satisfactory, and is not used, except in rare instances, outside of 
retail business. The only system worthy of consideration is that 
known as double entry bookkeeping, sometimes called the "Italian 
Method," because of its Italian origin. Double entry bookkeeping 
may be defined as the most accurate method or system of record- 
ing business transactions — its very nature requires the record of 
all, not part, of our transactions. 

I want to say, in preface to my description of double entry 
bookkeeping, that we have in every trade, barter or transaction, 
by whatever name you designate your dealings, an exchange. This 
exchange involves a person, firm or corporation with whom the 



ACCOUNTS AND ACCOUNTING 23 

exchange is made. Keep this thought clearly in your minds, for 
from this springs one of the fundamental rules of bookkeeping, 
but before giving it I want to state the first rule, which is, that for 
every debit there must be a like or equal credit — equal, that is, you 
may have any number of debits to persons, say for goods, the 
aggregate appearing in one amount at credit of merchandise 
account; or any number of credits and only one debit, the debit 
being the sum of the credits. This leads me also to call your 
attention to the word ''balance," so frequently used in connec- 
tion with accounts. You are aware that the word balance is 
synonymous with scales, and the old-fashioned scale with its two 
pans furnishes a very simple illustration of this prime rule of 
double entry bookkeeping. Suppose a pair of scales before us — 
if we put as much in the one pan as in the other, the scales would 
stand even, or balance. This is equally true in bookkeeping by 
double entry. For, if we debit one account with $1,000, and credit 
another with $1,000, the amount at debit and the amount at credit, 
being equal, balance, and the statement of that fact would be what 
is known as a "Trial Balance Sheet," which is a statement of all 
the balances on the ledger, and on which, if correct, the total of 
the debit balances agrees with the total of the credit balances. 
This is the rule which gives rise to the name "double entry." 

A very important feature in connection with double entry book- 
keeping is that property, goods and possessions are treated as 
debtors — the accounts are known as impersonal accounts, taking 
their titles from their character, such as cash account, merchan- 
dise account, bills receivable, real estate account, bond account, or, 
in a manufacturing business, in addition, such as machinery 
account, tool account, fixture account, etc. 

We will illustrate the matter by supposing that you are going 
to start in business. People commence business with money. 
Sometimes, however, only with credit, a very valuable possession, 
because it is given, as a rule, only to those who possess ability, 
industry and integrity — three winners in the race for success. 

To open your books, you would start your cash account and 

on the left hand side of the page enter, "Cash, Dr. to 

(yourself)" for the amount of money in your possession. The 



24 LECTURE NOTES 

left hand page in cash and the left hand columns of ledger and 
journal are always the debit, and the right hand side the credit. 
Now here we have the account of the thing (cash) debited and 
the account of the person (yourself) credited. This illustrates, 
also, the only other rule involved in double entry bookkeeping, and 
that is when you part with a thing — merchandise, cash, real 
estate, or anything of value which is represented in your business, 
you credit the account of that thing and debit the account of the 
person to whom you give it. On the contrary, if you receive any- 
thing, you debit the account of the thing received and credit the 
party from whom you receive it. In other words, your posses- 
sions owe you — as well as individuals. To recapitulate : We have 
two rules which govern all original entries in double entry book- 
keeping : 

1. For every debit there must be an equal credit. 

2. Debit the account of the thing received and credit the 
account of the party from whom you receive it; or, transposed, 
credit the account of the thing given and debit the account of the 
party to whom you give it. 

We now have in our minds the rules governing our entries and 
the importance of making our entries so clear and complete that 
they never require any explanation. Let us now consider the 
books themselves on which the entries are to be made. Originally, 
and down to quite recent years, a set of books consisted of a day- 
book, cash-book, journal and ledger. In the day-book were made 
all original entries of purchase, sales, exchanges, settlements — 
everything except cash matters. It was formerly the rule, which 
is still occasionally practiced, to re-enter in the journal in the 
technical form all entries from day-book and cash-book, as: 

April 9. Jones and Co., Dr., to Mdse. 

For goods sold them on six months credit, as per 

Day Book, folio 11 $1,000 00 

or Mdse. to Smith & Co. 

As per their invoice of April 9, for 10 cases of 
sheeting bo't on four months credit, per Day Book, 
folio 12 500 00 



ACCOUNTS AND ACCOUNTING 25 

or Sundries Dr. to Cash, 

(Comprising each of the parties to whom cash was 
paid, the purpose of payment, etc.). 
From the journal the entries are posted into the ledger under their 
respective accounts. As in the cases cited, merchandise account would be 
credited under the date of 

April 9. By Jones & Co., July 1 $1,000 00 

and Jones & Co. would be debited under the date of 

April 9. To Mdse., July 1 $1,000 00 

The journal has two columns : one, the left, for debits, and the 
other, the right, for credits. These are footed and carried for- 
ward to the end of the month (usually) and the agreement of 
totals shows that the debits and credits are equal, and as to 
amount, correct. 

With a view to the economy of labor, the journalizing of sales, 
purchases and cash is now dispensed with, and instead, the sales 
are entered in a sales-book, purchases in an invoice-book and 
postings are made direct from these and the cash-book into the 
ledger. Of course you will understand that in various lines of 
business similar books may be introduced adapted to the particu- 
lar business in view — my purpose is simply to call your attention 
to the fact that the former method of journalizing all entries is 
not now followed, as a rule. 

The ledger, when all the entries are posted, on one side ordi- 
narily shows credits to ourselves for our capital (which the busi- 
ness owes us), credits to others for amounts the business owes 
them, credits to bills payable (obligations given in settlement of 
debts), and perhaps, credits to accounts showing gains. On the 
opposite side, debit accounts of parties owing us, debits to bills 
receivable (obligations of parties due us), debits to merchandise 
account, cash account, or other property accounts, and expense 
accounts, and others as the nature of the business may involve. 
I only mention some general features. 

Debit accounts are usually assets. 

Credit accounts are usually liabilities. 

The exceptions are the accounts which are involved in the 
determination of gains or losses, such as expense account (which 
may have any number of subdivisions), interest account and 



26 LECTURE NOTES 

profit and loss account. These accounts when at the debit are not 
assets, for they represent nothing and nobody, and if there were 
no profits to offset them, would have to be charged to capital 
account — but the usual course is once or twice a year to close the 
books (these periods are called fiscal periods), when an inven- 
tory of goods and possessions is taken. 

We will suppose that we are doing a simple merchandise busi- 
ness, buying and selling. We shall have charged all our pur- 
chases to merchandise account, and we shall have credited all our 
sales to merchandise account. We will assume that our purchases 
have amounted to $100,000, and our sales to $90,000, but we find 
upon taking an inventory that we have goods on hand worth 
$25,000. Now, if we add the $25,000 to the $90,000 at credit of 
merchandise account, we have $115,000 as against a cost of 
$100,000. It is evident to you, therefore, that we must have made 
$15,000 profit. But to arrive at that in bookkeeping fashion, we 
debit merchandise account with $15,000 profit, and credit profit 
and loss account, bringing down a balance to the new merchandise 
account of $25,000, being the $10,000 balance already at the debit 
plus the $15,000 profit charged, making $25,000 as the 
value of merchandise and the debit to merchandise account with 
which to commence the new fiscal period. Now we find that we 
have $15,000 to the credit of profit and loss, but we have various 
expense and other debit accounts affecting the results of the 
business, and we debit profit and loss and credit these various 
accounts with their respective amounts (we may have also credit 
balances to other accounts, such as interest — affecting the 
result, and these we credit to profit and loss), and assuming that 
as a net result of these various debits and credits to profit and loss 
we have a balance of $10,000, this then is the net gain for the year, 
and we transfer it to our individual account by debiting profit and 
loss and crediting our account. 

This is an illustration of what takes place, with more or less 
modification as to the number, character and distribution of 
accounts, in every business whose records are kept by double 
entry bookkeeping, in the determination of profits and losses. In 
large concerns it is usual to adjust interest to the fiscal period by 



ACCOUNTS AND ACCOUNTING 27 

calculating amount of interest they would receive and pay to that 
date if all accounts were to be closed, and if the balance is in their 
favor, charging new interest account and crediting old interest 
account, or the reverse if the balance is against them. 

There is a remarkable feature in double entry bookkeeping — its 
universality. When you buy from A and credit him and debit 
your merchandise account, A on the other hands debits you and 
credits his merchandise account, and so the world over are the 
business records interwoven by the double entry system. 

Another very remarkable thing is, that the principles involved in 
double entry bookkeeping have not undergone any change. 
Forms of books without number have been devised to facilitate 
and subdivide work, but the underlying, fundamental rules stand 
and this fact alone is sufficient to demonstrate its great and abid- 
ing value. 

Now I have tried to set before you the basic principles of book- 
keeping, and though I have been obliged to introduce some 
features of practice, I trust I have made myself clear. The next 
point I wish to talk about is bookkeepers. There is no occupation 
which admits of such variation in capacity as bookkeeping. Take 
a bookkeeper whose experience has been mercantile and put him 
in a factory, and, as a rule, he will be as much at home as if he 
had been transported to a foreign land. Ordinarily, however, a 
bookkeeper can go from one house to another in the same line and 
adapt himself to the changes in forms. Many, because of their 
clerical accuracy in making entries, in posting them and taking off 
trial balance sheets, pose as expert accountants, but very few have 
any real capacity for arranging and opening accounts adapted to 
the wants and character of a new business or venture. This is 
properly the work of an accountant, and involves not only the 
knowledge of accounts, but of affairs, and this knowledge of 
affairs is the feature distinguishing the accountant from the book- 
keeper. The accountant is synthetic as well as analytic. 

Your education is supposed to fit you for the practical or 
material side of business, the utilization of natural and mechanical 
forces in their various forms. To this you want to add the knowl- 
edge of the relation of your operations to financial results. This 



28 LECTURE NOTES 

knowledge, coupled with the ability to compare the results of your 
operations with the results of others, begets an ability to analyze 
and dissect affairs in general, and you become in time ''men of 
affairs." To this end you should all look, you should all be men of 
affairs. I know of nothing that will add more to the value of your 
professional and technical acquirements than a knowledge of 
accounts sufficient to enable you to make a clear and intelligible 
showing of the operations and results of any venture or work in 
which you may be engaged. 

In my experience of over thirty years, I have never found a 
clerk or bookkeeper who could not calculate interest in the manner 
usual in commercial life, but I have never found one who could 
explain the rule by which he arrived at the result. Thousands of 
men are engaged in keeping books (and in other pursuits, for that 
matter) who cannot state (for they do not know) the primary 
rules governing their work. They know "how" in a more or less 
limited way, not "why." If I had the power, I would place on the 
walls of every classroom in the land two precepts : 

First. "Learn the why and you will always know how !" 

Second. "Never expect something for nothing." For in life 
as in bookkeeping for every debit there must be a credit, and if 
these precepts are followed, there will be an ability to do and a 
willingness to give a fair equivalent in exchange for anything and 
everything desired. 

And in conclusion, to you I would say — give your time, energy 
and ability to, and persevere faithfully in, your pursuits, and 
while you may differ in the measure of your success, you will 
all have success in a measure, notwithstanding differences in 
opportunities. 



THE RELATION OF MONEY AND BANKING TO 
ENGINEERING WORK 

By 
William Sherrer 

This paper is headed "The Relation of Money and Banking 
to Engineering Work." Before beginning it, I should say that I 
have treated the subjects very concisely. It has not been my good 
fortune to read papers at young men's colleges before, and possibly 
I have not enlarged upon the topics here quite as much as you are 
accustomed to hear. 

The relation of money and banking to engineering work does 
not differ materially from the relation to any other business enter- 
prise. It is the function of the banks to extend credit facilities to 
any and all undertakings which commend themselves to the judg- 
ment of their managers. It will, therefore, serve the purpose of 
this paper to lay before you a concise view of the history and 
practice of banking in general, and thus illustrate the important 
mechanism known as exchange in its broadest sense — involving 
not only the exchange of commodities per se, but the exchange of 
services and labor of all kinds as well. Money, which has been 
aptly termed the tool of exchange, becomes, by the assistance of 
banking, the great mechanical force by which almost all human 
activity is aided, encouraged and developed. 

(Money is utilized especially as a standard and a measure of 
values. In our modern life it has assumed various forms : metallic, 
in the shape of coin or bars ; and paper representatives, including 
notes, drafts, checks, etc. ) 

If you can imagine a state of civilization without money, you 
will at once conclude that during such a period, exchanges of 
products must have been attended with great inconvenience. For 
example, the shoemaker might readily obtain for the product of 
his labor a sufficient quantity of the butcher's commodities to last 
him several days; but since the butcher does not require shoes 



30 LECTURE NOTES 

every week, the cobbler would be compelled to find some one 
requiring shoes who would have something to exchange therefor, 
which the butcher desired ; and possibly it would be necessary to 
examine into the needs of a number of persons before the second 
exchange of shoes for meat could be effected. The introduction 
of a medium which the maker of shoes could obtain from anyone 
desiring footwear, and which medium would be entirely acceptable 
to the seller of meats, manifestly saves the several producers much 
time and labor, enabling them to produce more or increase their 
leisure hours. 

It is not necessary to pursue the evolution of money in greater 
detail, inasmuch as the natural results following the use of this 
medium will readily suggest themselves to your minds. Nor is it 
practicable in a short discourse to do more than refer to the 
obstructions which the debasement of money and the changes in 
the standard necessarily threw in the way of such a normal evolu- 
tion as would have contributed marvelously to the more rapid 
development of civilization. We must, however, give some atten- 
tion to what may be termed the second great human invention for 
the advancement of commercial intercourse, viz., the introduction 
of banking. I do not intend to convey the idea that this was an 
invention in the usual sense of the word : it was in fact a plant of 
exceedingly slow growth, retarded for centuries by untoward 
events, and not until the present era has the great value of this 
handmaiden to commerce been properly appreciated. 

The first bankers were merely money changers, and the busi- 
ness was carried on largely by the gold and silversmiths, who were 
best able to judge the value of the thousand and one kinds of coins 
which the numerous great and petty rulers of the world put into 
circulation and which required continual adjustment. Gradually 
this class of individuals became the repositories of considerable 
sums of money, at first for safe keeping on account of having 
strong boxes, and eventually for profit, for they soon found it 
practicable to loan out at interest the funds deposited with them, 
since the owners did not require them for immediate use; and 
thus it became their business to induce persons of wealth to leave 
money with them, paying for the use of it. These goldsmiths 



MONEY AND BANKING 31 

were, hence, the intermediaries between persons having a surphis 
of money and those having need of loans ; reaping an advantage 
themselves from the difference between the rate of interest allowed 
and that which they demanded from borrowers. 

Aside from the issuing of notes, to be considered further on, 
the function of banks remains practically the same to-day. It is 
their business to take charge of the money of one class of their 
clients, for or without consideration, and to provide the other class 
of clients with the sums needed for their enterprises; and the 
profit is still derived from the difference between the interest 
allowed upon the deposits and that received upon money loaned, 
whether it be to individuals upon their personal obligations, or to 
corporations or governments upon their bonds. 

As we have seen, the first bankers were individuals ; and to all 
intents and purposes the description fits the private bankers of 
to-day. When the practice of associating individual capital into 
corporations became prevalent, this was applied to banking busi- 
ness as well ; and the great majority of banking offices in this 
country are now of the corporate kind. The advantages of this 
are apparent, affording, as it does, a means of combining a por- 
tion of the available means of a number of individuals in one 
enterprise, providing the power of supervision of the governing 
power, and definitely fixing the liability of each individual con- 
cerned, which in the case of a private banker is necessarily im- 
practicable. 

Several kinds of banking corporations exist in the United States 
at present: national banks, organized under federal laws and 
subject to visitation by officers of the federal government; state 
banks governed by laws of the several states ; savings banks and 
trust (or loan) companies, also chartered by state authorities. 
Respecting the hanking functions of the national and state insti- 
tutions, no practical difference exists ; the former, however, exer- 
cise the privilege of issuing notes; savings banks in the eastern 
states are not capitalized corporations, but are conducted by 
trustees, not for their own profit but for the benefit of the deposi- 
tors ; in many of the other states of the Union, savings banks are 
stock corporations organized for profit to those whose capital is 



32 LECTURE NOTES 

invested; trust companies are similar institutions, taking con- 
siderable sums upon deposit for periods more or less fixed. 

The chief elements of difference may be briefly stated thus: 
savings banks receive small sums for relatively long terms, pay- 
ing fairly high rates of interest; trust companies receive larger 
sums for shorter terms, at lower rates; banks receive both large 
and small sums repayable on demand, and do not necessarily pay 
interest. Manifestly, in order to carry out their engagements, 
banks must have at all times a considerable reserve of unemployed 
money for immediate payments, while the other institutions 
reauire but a small fund for this purpose. 
(^Let us now examine the effect of banking upon commerce and 
industry. Every depositor receives from the institution some 
form of evidence that the sums are held for him. In banks these 
sums are subject to check, i.e., an order upon the bank to pay out 
the money. In actual practice, it should be remarked, the class of 
clients known as borrowers usually also become depositors, the 
banks placing the sum borrowed to their credit subject to check. 
Assuming now that A, B and C have deposited in bank for cur- 
rent business $200,000 ; and D, E and F have borrowed from the 
bank $100,000, which has been placed to their credit; the bank has 
thereby increased the amount subject to check to $300,000. Mul- 
tiply this instance several thousand times, and you have an exhibit 
of what is taking place in New York daily. Assume now that 
individuals designated transact business with each other, the pay- 
ments being made with checks, and it is readily seen that these 
paper orders take the place of the actual money and, aside from 
being more convenient, multiply the power of money many times. 
The sums are simply transferred from one account in the ledger of 
the bank to the other. Applying this to a considerable number of 
banks, it will be seen how much the evolution of the system has 
added to the forces available for the extension of human activity. 
Sixty-five institutions in New York City reported on Saturday 
last over $574,000,000 of deposits, and of actual cash less than 
$192,000,000 ; and this sum of money was $48,000,000 in excess 
of the proportion deemed satisfactory for the reserve purposes 
above mentioned.! 



MONEY AND BANKING 23 

To illustrate the banking process in the case of an engineering 
project, contemplated, for example, for the purpose of extend- 
ing the operations of a railway: the officers of the bank would 
require that the managers of the railway company exhibit the 
financial condition of the property, its probable earning power 
and its obligations. The great utility of having all the details of 
the business of the enterprise clearly and accurately set forth in 
a balance sheet drawn up from the accounts of the company, is 
obvious. It is, in fact, impossible to exaggerate the importance 
of such an exhibit ; for the question of the credit of a corporation 
is absolutely dependent upon it — its obligations cannot be placed 
without it ; the machinery of credit cannot work properly without 
the accountant's intervention to certify that the borrower is sol- 
vent and carrying on a remunerative enterprise. 

If the bank finds the exhibit satisfactory, the company's note 
is discounted, the credit is given and the sum involved is imme- 
diately subject to check; or, as is frequently the case with trust 
companies, the bonds of the railway corporation are taken and 
credit given either at once or upon their sale, which the trust 
company undertakes and in a measure guarantees. 

It has been demonstrated that the power of money may be 
further multiplied with safety through the issue of bank notes — - 
another form of paper representatives of money. The credit of 
an institution having been established, people in the vicinity are 
not loath to take, in lieu of the coin, a promise of the bank to pay 
the coin upon demand. The practice, which is of quite ancient 
date, has, until a comparatively recent time, been permitted to 
exist without restraint : private bankers, as well as incorporated 
institutions, very frequently issued large amounts of such prom- 
ises to the confiding public beyond their powers to redeem 
them. The gross frauds thus perpetrated led to the legislative 
control of various kinds, under which the amounts of notes issu- 
able is limited and proper provision for redemption made com- 
pulsory. Thus it is not uncommon to find a requirement that 
the note issues shall never exceed thrice the amount of actual 
cash in hand. This is regarded as a fairly safe reserve to provide 
for the notes that may be presented at any one time, and enables 



34 LECTURE NOTES 

the bank by the use of its credit to give the coin held for the pur- 
pose a threefold power in the commercial world. This does not, 
however, obtain in the United States, where banks which might 
otherwise avail themselves of the privilege under state laws, are 
prevented by a high tax upon issues of notes (10 per cent) 
imposed by the federal government, which has chartered banks 
of issue specially. But these latter can use the privilege only 
upon deposit of government bonds, which are held by the 
treasury as security to the note holder ; the banks are not required 
to provide more than one dollar in twenty for the purpose of the 
redemption reserve, which is also held by the government. 

This might perhaps be made a little clearer by this illustration : 
a national bank in this city, desiring to issue $100,000 in circu- 
lating notes, would be required to deposit $110,000 in government 
bonds with the Treasury Department in Washington. These 
bonds would be held by the treasurer of the United States in 
trust for the note holders. Should that bank fail, or should any 
of its officers run away with its money, the note holders would 
be amply protected — the United States Government keeping the 
deposited bonds in Washington. In addition to that, the bank 
must also deposit in Washington legal tender notes to the amount 
of $5,000 (i.e., $1 in every $20) for the purposes of the redemp- 
tion reserve. 

Our system of banking varies, therefore, from the usual form : 
ours are banks of deposit and discount, but hardly banks of issue 
in the proper sense; moreover the systems in other civilized 
countries almost invariably provide for one large institution, to 
which is given the issue power. Thus the Bank of England is the 
chief money issuing institution in Great Britain; it is, however, 
not authorized to increase the volume of the note issues as above 
described ; for besides a small amount emitted upon government 
bonds, its notes may only be issued upon deposits of coin or 
bullion; thus the function of augmenting the power of money is 
confined to its deposit and discount department; and when the 
ratio between its cash and the amount subject to check falls, it 
discourages the increase of loans and consequently of deposits 
and check money, by raising the discount or loaning rate. This 



MONEY AND BANKING 35 

frequently results in the importation of money from places where 
the rates are lower, affording relief to trade and yielding a profit 
to the owner of such money. 

The Bank of France, on the other hand, issues notes very freely 
within a limit fixed by law at 4,000,000,000 francs ; which sum is 
deemed sufficient for all the needs for many years to come. It 
is hence a much more useful institution than the one in London, 
combining, as it does, both of the chief functions for multiplying 
credit instruments ; although by reason of the facility with which 
the note issuing power can be used, the check system has not 
attained a high state of development. 

The American system lacks a great regulative institution such 
as exists abroad ; the forces available are not therefore utilized as 
much as they might be. Nevertheless, 10,000 banks and bankers 
with approximately $600,000,000 of cash, supply a present bank- 
ing power estimated at $6,700,000,000; showing that through 
these intermediaries the commercial and industrial enterprises 
have the power of money increased in this respect fully eleven- 
fold. A much greater multiplication of forces is effected, how- 
ever, by the system of clearing houses, which it is profitable to 
examine in greater detail. 

The system of bank clearings now in vogue in all the principal 
cities in this country is an example of how a small amount of 
money may be made to settle a large amount of business. The 
work of the New York Clearing House is an example of the 
economy. The records of that institution for forty-three years 
show that but $4.65 per $100 is all the actual cash needed to 
transact the business of the New York banks. 

Let me give you a brief description of its work — and here let 
me say that it would afford me great pleasure to have any or all of 
you young gentlemen call at the Clearing House and see the 
actual workings of that institution on any business day. 

Prior to the establishment of the Clearing House, banks were 
obliged to present the checks and drafts received by them on 
deposit directly to the banks for payment — I refer to checks on 
banks in New York City. At that time there were over fifty 
banks in New York and some fifteen or twenty in the adjacent 



36 LECTURE NOTES 

cities of Brooklyn and Jersey City. The labor of visiting each of 
the banks daily and collecting in gold or currency the cash called 
for by the checks was very great, and the attendant risk of loss by 
robbery was considerable. It was a daily occurrence for one bank 
to have many thousands of dollars more against another bank 
than that bank had against it, and in turn have many thousands 
of dollars less against another bank. The constant adjustment of 
balances and the necessary transportation of money through the 
streets, the loss of time and the expense of the work, called for 
some improvement in the manner of transacting the business. 

This was solved by the establishment of a central place, where 
each bank in the association could be represented by a clerk 
authorized to receive all checks chargeable at his bank and at the 
same time, with the help of an assistant, present to their represen- 
tatives the checks his bank had against every other bank. Thus 
we had one, in place of fifty-six. 

Let me describe the process of clearing; there are sixty-six 
banks who are now members, and seventy-seven non-members 
whose checks are cleared by member-banks. Each of these mem- 
bers is furnished with a desk ; the desks are arranged in numerical 
order. The clerk of each bank takes his seat at his desk; the 
messenger stands in front of the desk with the checks of his bank 
arranged in separate bundles, one for each bank. At the signal 
each messenger advances and deposits with the clerk at each desk 
the bundle of checks for that bank. The tour of the room is 
made in ten minutes ; when the messenger reaches his own desk, 
after making the tour, the packages of checks which have been 
received by the clerk of his bank are awaiting him. These he 
places in his now empty box and returns to his own bank. Thus, 
in less than one half hour two men have presented for payment 
all the checks which their bank held against one hundred and 
forty-two other banks — sixty-six members and seventy-seven 
non-members — and received all the checks presented against their 
bank by all the others. 

Under the old plan it would have required the services of at 
least ten men for one entire day to do the work of presenting 
checks for payment received by one of our banks in one day's 



MONEY AND BANKING 2,7 

business. This represents the saving of time now, as well as 
the use of a small percentage of money to the amount of checks 
brought to make the payments or settle resulting balances. Take 
the case of bank A as an illustration : We will suppose that bank 
A takes to the Clearing House checks drawn on other banks 
amounting to $1,250,000; for this amount that bank is credited 
on the books of the Clearing House ; after the delivery of pack- 
ages has been finished and the clerk of bank A has made a list of 
the amounts the other banks have presented against his bank 
and footed them up, he finds that amount to be $1,200,000; the 
result showing that bank A is credit $50,000. Why? Because 
the amount of the checks that that bank had against all other 
banks exceeds the amount all the other banks had against it to 
the amount of $50,000 ; so that the condition of each bank is soon 
shown for that day. Each of the sixty-six members will be debit 
or credit, as will be shown by the differences between the total 
amount of the checks brought and received by each. The balance 
sheet of the Clearing House of the day will show which is debit 
and which is credit. The total of the amount of checks brought to 
the Clearing House will, of course, be the total of the amount 
taken away ; as of course the total of the debit balance will equal 
the total of the credits. 

Now, as to the final settlement of these balances: the debit 
banks — or those who brought less than they received in checks — 
must pay the difference to the Clearing House in actual cash by a 
certain hour. After the debit banks have paid the amount owed 
by them, the credit banks are paid the amount due them caused 
by their having brought more to the Clearing House than they 
received in checks. 

In this description of detail, I may have caused you to lose 
sight for the moment of the principle of economy in the use of 
money, as well as the saving of time, that makes the Clearing 
House system the useful and important aid that it is to the bank- 
ing and business community. 

The exchanges at the New York Clearing House average at 
the present time $90,000,000 per day. Were it not for this system, 
this, or most of this, large sum would have to change hands daily 



38 LECTURE NOTES 

with the attendant risk of loss. Now we find that less than five 
per cent of actual cash is needed to settle the balances resulting 
from the exchange. 

You will observe that the bank is either debtor or creditor of 
the Clearing House and not to the individual banks (or mem- 
bers, as they are called) ; consequently they make one settlement 
instead of one hundred and forty-two. 

Bank clearing houses have proved so useful to the banks and 
business men that there are now seventy-two of them in operation 
in the United States, all working upon the same plan as the Clear- 
ing House in New York City. 

Thanking you for your attention, permit me to say in conclu- 
sion that in this lecture I have been able to give only the outline 
or a mere sketch of money and banking and their relation to busi- 
ness. As all business and professional work is largely dependent 
upon the bankers for success, let me urge upon you the necessity 
of acquiring a knowledge of the ordinary details, at least, of this 
important help to your future growth in your profession. It is 
an old and timeworn saying that "Knowledge is power." He 
who would have power must work and deserve it. 



SHOULD THE STEVENS CURRICULUM INCLUDE 

INSTRUCTION IN BOOKKEEPING AND 

ACCOUNTING? 

By 

Alexander C. Humphreys 

I have been asked to furnish the Stevens Institute Indicator 
copy of a lecture delivered by me to the Junior class at the end of 
the second term's course in accounting. 

The so-called lecture was an informal talk in which I did not 
attempt to give instruction in bookkeeping, but only to impress 
upon the class, partly by a recital of my own experiences, the 
importance to the engineer of a knowledge of the fundamentals 
of accountancy. 

I shall not attempt to reproduce this talk, but I shall endeavor 
to justify an affirmative answer to the question contained in the 
above title. 

If this addition to our curriculum is to be permanent and is to 
be of practical value, the faculty and the students must first be 
convinced of the wisdom of the change. 

If the students are to be fully benefited by this or any other 
feature of the course, they should not do the work under protest. 

It is unquestionably a fact that students following a special, 
technical course such as ours, too often fail to appreciate that their 
studies should not be confined to the technical branches, but should 
be broadened out to include subjects of more general interest 
and value. 

It is not uncommon to hear such students protesting against 
the study of the English language as waste of time; and fre- 
quently it is not until after graduation that they learn that it is 
necessary for them to have, not only the special knowledge and 
training admittedly required for their chosen calling, but also 
sufficient command of language to enable them to give expression, 
forcefully and without ambiguity, to propositions, statements, 
arguments, deductions and conclusions. 



40 LECTURE NOTES 

Many a Stevens graduate, otherwise well equipped, has been 
handicapped by this lack of ability to express definitely what he 
had in mind, and it is a source of congratulation to many Stevens 
alumni that steps have been taken recently to strengthen the 
curriculum in this particular. 

It is to be hoped that the course may be still further broadened 
to include the language of the commercial and banking world, the 
world in which the successful engineer sooner or later finds it 
necessary to establish a standing. 

While urging this addition to the curriculum, I am not unmind- 
ful of the fact that the students who are conscientiously living up 
to the requirements of the course, are already loaded almost to 
the breaking point. This means that for every addition to the 
course there should be a corresponding subtraction. 

To cover in four years the practical and theoretical branches of 
our course in engineering makes necessary the careful discrimi- 
nation between the practical and the simply academic considera- 
tion of science and mathematics. 

While a strictly academic consideration of these branches is 
interesting and perhaps important, it must be discriminated 
against if we are to arrive at a maximum of practical efficiency. 

It may be claimed confidently that the Stevens course is emi- 
nently practical, and the record of Stevens alumni is an unanswer- 
able argument to this effect. But this does not imply that further 
improvement cannot be made which will render still more certain 
the graduation of men who can promptly and efficiently put into 
effect their Stevens training. 

Certainly the curriculum must be of more practical value if it 
furnishes the student with such a fundamental knowledge of 
accountancy as will enable him to indicate accurate methods for 
recording costs of construction and operation, to determine the 
accuracy of such records when placed before him for examination, 
and to analyze intelligently statements of cost and profit and loss. 

This subject I have discussed with a number of Stevens alumni, 
and I have sometimes been called upon to meet the statement that 
it is absurd to expect engineers to do bookkeeping work — they 
are not trained for it, and there is no reason why they should be 



INSTRUCTION IN ACCOUNTING 41 

so trained ; bookkeepers can be hired to do it for them. It might 
be replied that a man in going through Stevens does not expect to 
earn his living afterwards as a mechanic, and yet the course 
includes a very considerable amount of shop instruction, and it 
has been proved that such instruction is not only important, but 
necessary. If it is important to teach the engineer how to do 
mechanical work, and especially how to judge if such work has 
been properly done by others, is it not also important that engi- 
neers should be so equipped that they can indicate how the records 
of their work shall be kept so that they can determine accurately 
at the end of the year what has been the commercial result of their 
operations f And is it not important that they should also be able 
to judge as to the accuracy of claims made in regard to the profit- 
ableness of a certain process or undertaking? 

An examination into the value of a process or of a plant neces- 
sarily involves the question of commercial results, and if a com- 
mercial record has already been established it would be folly to 
neglect that record. Such an examination is usually made in two 
parts ; first, an engineering examination, and, second, an account- 
ing examination. Unless these two examinations coordinate, the 
report may be worthless or worse than worthless. 

Even in our own business we are called upon constantly to 
determine which is the most efficient or economical of two or more 
methods of doing the same thing. We may theorize on the sub- 
ject, but the final, practical result must be learned through books 
of account. 

Is it not, then, important that the engineer who becomes respon- 
sible for certain estimates of cost of construction, or of profit 
from operation, should be in a position to determine whether or 
not the books, as kept, accurately show the results obtained ? 

My experience goes to show that very grave errors are being 
made constantly in this direction through inability to bring into 
accord these two branches, and the deplorable condition of many 
a bankrupt concern is due to this failure to harmonize properly 
the engineering and accounting branches of the business. If an 
engineer is uninformed as to the ordinary steps in bookkeeping 
and accounting, he will be lost when he attempts to decide 



42 LECTURE NOTES 

promptly as to the correctness of certain fundamental entries. 
Probably he will be able finally to lay out the correct course if the 
question is forced upon his attention, but this, most likely, will be 
too late to prevent serious trouble. 

As a result of considerable agitation on this subject, two years 
ago some lectures were given on business methods to the Senior 
class of Stevens. 



The next year instruction in this subject was not resumed, but 
in the spring of 1899 the Senior class was given a short course of 
lectures by a chartered accountant, but practically it was left 
optional with the students to attend the lectures or not; that is, 
no examination was insisted upon. This was found to work ineffi- 
ciently. The students, fully burdened as they were with other 
work, naturally neglected a subject which was not made obliga- 
tory. It was therefore decided when the lectures were resumed 
for the benefit of the Junior class in the second term of this year 
to include an examination, and some effort was made to lighten 
the course in other directions. Those who are responsible for 
this addition to the curriculum appreciate that a knowledge of 
bookkeeping and accounting cannot be imparted in a series of ten 
lectures, but as the aim so far has been chiefly to awaken an inter- 
est in the minds of the students, and to instruct them only in the 
fundamental principles involved, it is felt that no more has been 
demanded of the students than could be exacted fairly. 

In my efforts to impress upon the students the importance of 
this subject, and to get them to appreciate the final value to them 
of this instruction, I was able to give them many cases from my 
own experience, and I especially referred to four cases within the 
last year or so, where a knowledge of accounting was important 
in connection with questions of engineering practice. In all of 
these cases it was necessary either that the accountant should be 
thoroughly informed on the technical details of the business or 
else that the engineer should be capable of analyzing the state- 
ments of profit and loss. 



. INSTRUCTION IN ACCOUNTING 43 

The first case referred to was one of consolidation, and my 
report had to deal in part with the proportionate values of the con- 
stituent companies as determined mainly by net earnings. 

My preliminary investigation led me to believe that the actual 
profits of one of the companies were far below the amount 
claimed and that the fictitious figures were obtained by charging 
to four construction or investment accounts expenditures which 
should have been debited to operating cost. As usual, the report 
was required within a limited time and the time limit did not 
permit of a complete audit and scrutiny of the classification of all 
vouchers. But familiarity with the technical and practical sides 
of the business enabled me to demonstrate that many items 
charged to the several construction accounts were not capable of 
being verified by corresponding extensions or improvements made 
to the plant during the year. 

It was found necessary to credit these construction accounts 
and charge the proper expense and repairs accounts with about 
$200,000, thus reducing the net earnings for the year to that 
extent. 

The profits, as ordinarily stated, had been further considerably 
swelled by the inclusion of items, such as premiums on bonds 
sold, which items were extraordinary in character and not there- 
fore to be considered as part of the regular income when using 
the year's statement of profit and loss as a basis for estimate of 
future profits. These latter items, it is true, would have been 
readily detected and adjusted by any competent accountant, but 
the readjustment of construction and repairs accounts could not 
have been made without the engineer's technical knowledge, and 
it was only by the combination in one person of the knowledge 
of accounts and technical details that the work could have been 
completed with substantial accuracy within the time allowed. 

Furthermore, so violently and persistently was the accuracy of 
the report assailed, that this combination of training was found 
to be a matter of great importance if not of actual necessity if 
my radical corrections of the profit and loss statements were not 
to be finally discredited. 

The second case referred to was of quite an opposite character. 



44 LECTURE NOTES 

The company examined had for many years been operated in 
the interest of the bond holders. The result was that the net 
earnings were not fully shown, charges having been made regu- 
larly to repairs (operating expense) which should have been 
made against extensions of plant. Thus the mortgage had been 
"fattened" materially. Our examination was followed six 
months later by an examination by public accountants of high 
standing, assisted by an engineer, who, from lack of time and 
unfamiliarity with the particular branch of engineering involved, 
did not afford the accountants the requisite technical assistance. 

The result was a report showing profits much below the facts. 
Upon the accuracy of this report being questioned the defense 
was made that a different result could have been obtained only 
by a complete audit including scrutiny of classification of all 
vouchers, and this last would probably not have been conclusive 
through inability to correct cases of involved classification after 
the controlling facts had grown cold. 

Our widely different and more correct result was obtained in 
part by examining the vouchers, and in part by examining the 
inventory of plant at the first of the year and then, by detailed 
examination, determining the legitimate extensions and improve- 
ments made during the year. 

In this case, as in all others, careful discrimination was made 
between repairs or renewals and extensions or improvements. 

The third case was still different. It was an examination to 
determine why the cost of a certain large manufacturing plant 
had largely exceeded the original estimate. The classification 
and subdivisions assumed in the estimate had not been adhered to 
rigidly in the accounts as actually kept. An analysis was there- 
fore impossible by a simple comparison between the estimate and 
the balances to the debit of the several construction accounts. A 
careful subdivision of each account was necessary and this had 
to be done by one familiar with the technical details of the plant. 

Again it was necessary to determine whether or not the plant 
had been in all particulars constructed in accordance with the 
original specifications, or whether it had been in certain points 
increased or decreased as to capacity. 



INSTRUCTION IN ACCOUNTING 45 

Many other technical features entered into the investigation. 
Some months were required to complete the work and the able 
accountants assisting were free to admit that a knowledge of 
accountancy alone would not have been sufficient for the accom- 
plishment of the result sought. 

The fourth case was quite different from all the preceding. 
It was an investigation to determine the value of a certain manu- 
facturing process for which was claimed marvelous results. A 
profound impression had been made by the promoter upon some 
strong financial men, and especially by the use of the following 
two statements: 

1. The process depended upon certain laws of nature not 
before known ; therefore this process could not be valued by the 
"old-fashioned" science; and 

2. The truth of the claims could be verified by the commer- 
cial results actually obtained in the case of a plant which had 
been in operation for one year. 

Both of these are, as a rule, most convincing arguments to the 
average business man, and especially so when the two are com- 
bined. 

After a careful investigation there was no difficulty in pre- 
senting to the trained engineer a demonstration of the absolute 
worthlessness of the process. 

But the business man could not understand the technical points 
upon which this demonstration depended, and, furthermore, the 
adroit promoter had prejudiced the business man's mind in ad- 
vance against arguments based upon acknowledged scientific 
truths. 

It therefore became necessary to make a careful examination 
of the company's books to prove that the profits shown by the 
accounts and by the reports to the directors had not been ob- 
tained. The extraordinary operating results had been obtained 
while construction was still in progress, and thus no difficulty 
had been experienced in writing up operating cost charges to 
construction accounts. 



46 LECTURE NOTES 

The directors themselves had been deceived and thus had been 
led to furnish the promoter with endorsements of the process. 

One of the results of this investigation was to throw the pro- 
cess out of this show plant and to install in its place the process 
which the promoter of the "fake" process was chiefly aiming to 
"strike." 

It may be claimed that in all four of the cases here briefly 
described my work was not such as ordinarily comes to the engi- 
neer. But a little thought will show that in each and every case 
the troubles met and rectified could have been avoided by an 
honest and intelligent supervision of the accounts by the engineer 
in charge. 



In my talk with the Junior class this year I was encouraged 
to find that apparently a majority were interested and appreciated 
that the subject was one not to be lightly regarded. I was, there- 
fore, all the more disappointed to find later that the class had 
entered a protest with the President against an examination, 
claiming that the instruction had not been sufficient to enable 
them to pass an examination. As the character of the examina- 
tion had not yet been disclosed to them it was evident that the 
protest was premature. This was confirmed by the generally 
satisfactory result of the examination. 

We had first to determine whether or not it was wise to intro- 
duce such instruction ; and, second, whether or not we had acted 
wisely in the choice of methods. The result of the examination 
was largely to be depended upon to inform us on the last point. 
While suggesting where improvements and modifications could 
be introduced wisely, this result afforded encouragement in both 
particulars. 

Students of a college or university should have in view the 
acquirement of a training which will best fit them for their life's 
work, and especially in the case of those attending such an insti- 
tution as Stevens they should have in view the acquirement of a 
training and mental equipment which will best fit them to meet 
promptly the practical problems incidental to their life's work. 



> 



INSTRUCTION IN ACCOUNTING 47 

Some, though not many, go through college simply from the love 
of the knowledge to be acquired, but we can assume safely that 
with a large majority of student engineers their object is to make 
themselves of the greatest possible value to their employers, and, 
hence, to themselves. An engineer capable of intelligently con- 
sidering questions of accountancy can command positions where 
a man only equipped to execute engineering work would be left 
unemployed ; and, furthermore, the former's services will gener- 
ally command a considerably larger compensation either in the 
form of salary from an employer or as profits from his own busi- 
ness. 

This being the case, Stevens Institute, to keep up with its rep- 
utation for practicality, should give some instruction in a subject 
of such vital importance, if only sufficient to familiarize the stu- 
dents with the principles involved, and to show them why the 
subject is an important one to the engineer. 



BUSINESS TRAINING FOR THE ENGINEER 

By 

Alexander C. Humphreys 

Self-evident should be the truth of the proposition that the 
engineer ought to be a man of business, or at least, informed of, 
and prepared to conform to, business conditions and business 
methods. When this proposition is squarely laid before them it 
is self-evident to the majority of successful engineers and men 
of business. Business men, bankers and manufacturers not infre- 
quently refuse their confidence to engineers and experts as a 
class, because, under trial, some individuals have demonstrated 
their incapacity to meet business conditions ; from the standpoint 
of the man of business their reports, advice, conclusions have 
required interpretation and readjustment or amendment. 

The man, so far somewhat exceptional, who is able to bring 
to the service of his clients or associates a sound technical train- 
ing and the ability to meet business conditions, proves by his com- 
parative success the material value of this dual capacity. For the 
sake of the profession and the country at large it is important that 
this broader capacity should no longer be exceptional. 

To this end the professional educator and the engineer-student 
must better recognize the conditions to be met in practice. A 
general and definite demand on the part of the business world for 
engineers of broader capacity would ensure the necessary reform 
in the separate schools of engineering and the university depart- 
ments of applied science. All that is possible should be done in 
the technical schools to harmonize theory and practice. 

Great Britain recognizes this interdependence, and her fore- 
most men are finding in the lack of sufficient technical training 
the explanation of Britain's loss of commercial supremacy. Pro- 
fessor John Perry, for example, concluded a notable address 
recently delivered before the engineering section of the British 
Association for the Advancement of Science in these words : 

"When men can hardly take a step without seeing steam engines and 
electro-motors and telegraphs and telephones and steamships, with drain- 



I 



BUSINESS TRAINING FOR THE ENGINEER ' 49 

age and waterworks, with railways and electric tramways and motor cars, 
when every shop window is filled with the products of engineering enter- 
prise, it is getting rather difficult for people to have any belief in evil 
spirits and witchcraft. All the heart-breaking preaching of enthusiasts 
in education would produce very little effect upon an old society like that 
of England if it were not for the engineer." 

From a recent article by Sir Philip Magnus, on the present 
industrial importance of technical education, I give two short 
quotations : 

"In the report of the special committee of the London County Council, 
to which I have already referred, it is, I think, conclusively shown that of 
late years we have lost other branches of trade than those above named, 
and that this loss is largely due to the superior educational equipment of 
our neighbors." 

"The successful engineer must be, of necessity, a man of business." 

After graduation the young engineer will be influenced by 
commercial conditions, and perhaps by his own natural bent, to 
become a specialist. To-day the field of engineering is so wide 
and the requirements are so exacting that no man can expect to 
excel unless he confines himself within certain rather narrow 
limits. But no matter to what part of the field he confines his 
efforts, he will find himself surely limited and bound, more or 
less, by commercial conditions. 

From this it may be argued that the engineer should not aim 
to be also the commercial manager ; as a specialist, he should con- 
fine himself to the engineering branch of his business. To this it 
may be replied that whatever special branch of industry is 
adopted, the engineer must understand and practice in harmony 
with the commercial conditions of that specialty. There may be 
a further specialization between the engineering and the com- 
mercial management, but the engineer should have at least a 
knowledge of the general fundamentals of business practice and 
also a knowledge of the special limitations attaching to the par- 
ticular business pursued. 

As in schools of engineering we cannot expect to instruct the 
students in all the specializations of engineering science and prac- 
tice, so with instruction in business methods we cannot expect to 
give more than a broad training in fundamentals upon which the 



50 LECTURE NOTES 

student can safely and expeditiously build when the need for 
specialization is encountered. 

If it be admitted that the engineer-student should receive some 
instruction in business methods before graduation, it then remains 
to be determined what can be added in this connection to a course 
already crowded almost to the limit. Perhaps the matter of first 
importance is accountancy. We cannot expect to train the stu- 
dents to be expert bookkeepers, nor is it necessary to do so ; but 
we can expect to give them what is of more value and what many 
bookkeepers do not possess — sound knowledge of the principles 
of double entry bookkeeping. This knowledge engineers need, if 
for nothing else, to enable them to exercise a close, intelligent and 
independent supervision of manufacturing cost. 

The students should be taught to discriminate carefully and 
conscientiously between the charges to capital or revenue, and 
they should be warned of the ease with which errors can be made 
in this connection and the. disastrous consequences likely to 
follow their commission. They should also be shown the neces- 
sity for making adequate provision for depreciation of plant, the 
scheme to be based upon an exhaustive analysis of local condi- 
tions and not upon the blind acceptance of arbitrary rules formu- 
lated by accountants. They should be shown that books can be so 
kept, either through ignorance or design, as to hide the facts and 
to present a warrant for the payment of dividends unearned. 
They should be shown that all this, and much more, they will 
need if they are to be competent as managers or reliable as 
advisers in connection with the purchase of properties. 

They should also be shown that often, when called in to pro- 
nounce on the value of some new apparatus or process where 
these have already been under commercial test, the technical 
investigation may be supplemented to advantage by a competent 
examination of the books of account ; and that here the man who 
is only an engineer or only an accountant probably will be found 
incapable of conducting such an examination. In such a course 
should also be included enough instruction in the science of 
statistics to warn the student against the danger of drawing con- 
clusions from insufficient or inconsistent data. 



BUSINESS TRAINING FOR THE ENGINEER 51 

In connection with the work in this and other departments the 
effort should be made to bring the students to a keener appre- 
ciation of the value of a working command of English. They 
should be shown that it is not enough that they possess the knowl- 
edge, but they must have the ability to convey to others, and 
especially to their clients, in language concise and free from am- 
biguity, the results of their professional or administrative work. 

Unquestionably there is a crying need for more efficient work 
in the teaching of English in the schools of technology, and 
perhaps this statement may fairly be extended to include some of 
the colleges and universities. Reform in this direction is most 
difficult of accomplishment. The work performed is too often 
of a perfunctory character, whereas it should be characterized by 
enthusiasm and originality. The time available is limited, and, 
therefore, the first care should be to give such a training in Eng- 
lish as will be most efficient to meet the requirements of profes- 
sional practice. 

This leads naturally to another feature which should be 
included in the department of business methods — instruction in 
the law of contracts. We cannot expect to give engineer-students 
a working knowledge of the law of contracts, but we may very 
reasonably expect to impress them with the dangers to be encoun- 
tered and the necessity of knowing when it is advisable to seek 
thoroughly competent legal advice. Some advice in this line can 
also, to advantage, be included in the lectures on engineering 
practice. 

At Stevens Institute of Technology a course in business 
methods was started in 1897, though it was not until two years 
later that the work was put upon a firm basis. At first a number 
of engineers and bankers gave a series of lectures to the Senior 
class to point out by examples from their own professional and 
business experiences the necessity for the engineer to recognize 
that his work must be in accord with commercial practice. Two 
years later ten lectures on accountancy were delivered to the 
Junior class; but as this work was left optional, the students 
derived little benefit from it. For the last three years the course 
has included twenty lectures and recitations, followed by regular 



52 LECTURE NOTES 

examinations. It is believed that this course has been of real 
value, and could have been of far more value if the students in 
the first few lectures could have been brought to believe that this 
is a subject which properly belongs in a course in engineering. 

Now this part of the curriculum has been again carried forward 
to the Senior year. It is hoped and believed that from now on 
this feature of the curriculum will be of much greater value to the 
students because the first few lectures will be delivered by suc- 
cessful engineers and business men who have in their work 
demonstrated the necessity, or at least the advisability, of such 
training. It is believed that the students will be ready to accept 
such testimony and act upon it where they would not do so if the 
advice were offered by professional educators or accountants. 

As it is important that the first year's class should be impressed 
promptly with the practical necessity for such a knowledge of 
English as has already been spoken of, a few talks will be given 
to the entering classes to bring them into a more sympathetic and 
receptive mood toward this and all other non-technical studies 
included in the curriculum. 

Generally the entering class in their wisdom are ready to de- 
nounce promptly as useless or out of place these non-technical 
studies; thus the sympathetic cooperation of the students, which 
is such an important element in the efficient teaching required in 
a full course of study, is not obtained, and the foundation is laid 
for many regrets to be experienced in the years after graduation. 



.. FACTORY DEPRECIATION— THE PROBLEM OF 
CORRECT VALUATION 

By 

EwiNG Matheson 

The increased attention given during recent years to improved 
methods of factory administration has been largely stimulated by 
American example. The laying out of works so as to allow the 
most economical sequence of operations, the standardization of 
patterns, and the consequent facilities for repetition tools are all 
regarded now with much greater interest than formerly. Out of 
this has come the simplification of accounts, not only of material 
and labor, but also those relating to the distribution of stores. All 
these, together with the general charges pertaining to the business, 
afford a basis for estimating future expenditure and profit. But 
the allowance to be made for that wasting of the capital invested 
in the factory, due not only to specific wear and tear of the plant, 
but to many other causes as well, has not received all the attention 
it deserves. 

No concern can last unless the cost of manufacture, which 
forms the basis of price, is charged with the wear and tear of the 
apparatus or machinery employed and includes also a provision 
for contingencies. Such a provision may, like premiums of fire 
and life insurance, press lightly if attended to from the first. In 
fire insurance the risk may never become a loss. In life insurance 
the loss, though long deferred, must come eventually, and so a 
factory plant must, at some time, cease to have any value worth 
keeping. 

There are many differences of detail in the methods of depre- 
ciation allowance adopted by managers and accountants. In 
some cases buildings, machinery, and plant in the factory are 
treated as a whole; in others these three are classed separately, 
with a special rate of depreciation for each. A fixed proportion 
of original outlay may be written off yearly, or a percentage may 
be deducted on a continually diminishing value. The choice 



54 LECTURE NOTES 

between reserve sinking fund and depreciation is greatly assisted 
by special tables drawn up for the purpose, showing the different 
effects of the various systems and the annual charges necessary 
to each. 

It is impossible here to enter into these and other methods 
adopted by auditors or skilled accountants in applying systems 
of depreciation, but it is possible, and may be useful^ to enunciate 
the principles involved. If the main point be observed of allow- 
ing out of gross income for the contingency of decreasing assets, 
it is not of vital importance whether such allowance be carried 
out under the name of reserve or sinking fund, or depreciation. 
If thrift be exercised, one need not consider too closely the name 
given to it. While, however, the exact method is of secondary 
importance, it may still prove extremely inconvenient if any inap- 
propriate system or designation be adopted, for it may mislead 
those who are not fully acquainted with the purpose of the plan 
and its effect. 

Partners may have such various interests in an undertaking as 
to make the question of depreciation of great importance. A 
managing partner may be entitled to a share of profits equal to 
that of the sleeping partner who provides the capital. It is to the 
interest of the first to show good annual profits without an 
excessive provision for future contingencies, while the second 
may prefer to keep his capital intact by liberally writing down 
out of gross profits the nominal value of the plant. On the other 
hand, it may be unfair to the working partner who has only a 
fleeting interest to safeguard the future in which he has little 
concern by too liberal a writing down. There are methods, easily 
formulated by skillful accounta^nts, by which this difference of 
interests may be met, such as by an occasional review, or by pro- 
viding for revaluation if the partnership be dissolved. 

/a reserve is generally understood to be a fund available in 
c^se of need. If it is to meet some possible sudden contingency 
or to equalize dividends, it is important that the fund shall be 
liquid in money at call or in investments easily realizable ; that is 
to say, available without delay. If, however, it is intended only 
to maintain the capital value of the concern, so that it can be 



FACTORY DEPRECIATION 55 

realized in money when the business is wound up or sold, then the 
reserve may, with prudent limitation, be invested in the business 
itself and applied to the purchase of land, erection of buildings, 
or in some other way to increase the manufacturing capacity of 
the works. If the existence of either kind of reserve be held to 
obviate the need for depreciation, and the original value remains 
undiminished in the inventory of plant, or annual balance sheet, 
then the designation is fallacious, for it might appear to those 
outside the management that the capital is intact, as well as the 
reserve, when really there is only one of these two available 
resources. Such an inference is natural even when the fund is 
entitled "reserve and depreciation.") 

While vague methods of providing for the future may be 
sufficient, though not wholly satisfactory, when only a few 
partners are concerned, they are not so in joint stock companies 
w^here numerous and different rights have to be safeguarded. In 
justice to all concerned, the annual account should show the 
correct position of affairs, so far as experience and foresight can 
elucidate them. There may be as much exaggeration in writing 
off as in neglect to write off, and either error may cause loss to 
those who are uninformed about it. 

While in regard to buildings, plant and machinery, every branch 
of trade has its own special incidents so far as physical wear and 
tear are concerned, there are special circumstances of an entirely 
different kind which, from time to time, have to be considered 
and to which all kinds of enterprise are liable. In the great 
staple trades alterations and improvements become necessary 
which may render obsolete much of what stands in the books of 
accounts as of considerable value. Those concerns which have 
provided nothing for these contingencies by writing down or de- 
preciating their plant, and for which the managers are unable 
or unwilling to provide new capital, must of need go under in the 
struggle with competitors better prepared. 

As examples, the old-fashioned flour mills, sugar refineries and 
chemical works which brought regular profits to their proprietors 
thirty years ago have had to be reorganized and, to a large extent, 
reconstructed to meet modern practice. The manufacture of 



56 LECTURE NOTES 

Portland cement affords another example. The monopoly of the 
Thames and Medway Cement Works in England has been upset by 
Continental and American rivals, and only new expenditure on a 
considerable scale will bring them into line. One need hardly 
refer in Gassier' s Magazine to the changes and improvements in 
the steel-making and shipbuilding trades which have affected 
largely the capital accounts. These remarks might be regarded as 
truisms whose recital is unnecessary were it not that so many 
old and respectable concerns have had to pay the penalty of ignor- 
ing them. 

As new kinds of machines and plant are invented and applied, 
proper rates of depreciation can be evolved only as experience 
guides. As an instance, interesting questions are arising in con- 
nection with electrical apparatus and its depreciation. On the one 
hand, some of the materials used, such as bitumen, lead, vitrified 
conduits, and copper, may, if undisturbed, be deemed almost im- 
perishable; others, liable to attrition or to rapid movement, or 
those exposed to wind and weather, may deteriorate quickly. 
During the transition period, till experience has shown the way, 
prudence will suggest a liberal provision not only for these phy- 
sical causes, but to meet also the probability of new inventions 
rendering the plant valueless before it is worn out. In a period of 
twenty years methods of electric lighting have been entirely 
altered; tramways have been changed from horse traction to 
steam locomotives, then to cable haulage, and now a change to 
the electric underground conduit system seems likely to supersede 
many of the overhead electric trolleys so lately erected. There 
is a reluctance to acknowledge these risks in advance. Those 
who are concerned in new enterprises are assured by the sanguine 
inventor or engineer that finality has at last been reached, and 
that, in regard to renewals and depreciation, nothing need be 
considered beyond the mere physical wear and tear that attend 
all industrial plants. 

A sinking fund is the form generally adopted for the recovery 
of capital invested in some asset wasting by the passing of time. 
As examples, leasehold property, patents having only a few years 
to run, or minerals which are becoming exhausted. If established 



FACTORY DEPRECIATION 57 

early enough, the annual provision of such a fund may be small 
and can be measured exactly. There are other and less tangible 
assets which are also of a wasting nature, such as good will. It 
has sometimes been argued, even with the support of experienced 
auditors, that to commence writing down the value of good will or 
patents immediately after they have been purchased would be an 
acknowledgment that too high a price has been paid for them. It 
might as well be said that if a short lease has been purchased it 
is not necessary to institute immediately a sinking fund to recover, 
at the end of the term, the capital so expended. It is true that 
while the duration of a lease is evidently limited, that of good 
will is speculative or unknown. Yet if in any branch of trade a 
retrospect be made of numerous undertakings profitable twenty 
years ago, it will be found that a considerable proportion of them 
have diminished or even ceased to exist, and that the good will if 
now sold would realize little or nothing. It is, however, right to 
mention that the courts have not always upheld the severer course 
here advised, for it has been decided in the case of a wasting asset 
that directors of a company are not bound to make a sinking fund, 
but may distribute their entire profits if they choose. The point 
urged here, however, is that candor and fairness should induce 
them to explain their course to all concerned. 

The property in ships affords examples of both systems. The 
principal companies who own fleets of steamers owe much of their 
prosperity over a long period of years to their rule, rigidly applied, 
of writing down at a liberal rate the value of their vessels and of 
applying their revenue as net income available for dividend only 
when this charge has been met. According to this method not only 
are all repairs defrayed out of revenue, but vessels which may 
have cost £20 per ton are depreciated annually till they stand in 
the books at only £8 — a price at which they can be sold, for the 
usual practice is to sell old or obsolete boats and to replace them 
by new ones of modern design. Unless the gross profits of the 
undertaking would bear the cost of such depreciation, the under- 
taking is not really profitable, and as the period within which 
steamers remain in the first rank seldom exceeds ten years, the 
rapidity of the change affords a convenient object lesson. 



58 LECTURE NOTES 

The less heroic method is generally found in the joint owner- 
ship of one or more sailing vessels or tramp steamers whose des- 
tinies are controlled by managing owners. The full income, after 
defraying current expenses, including marine insurance, is all 
divided as profit, each shareholder being left to provide as he 
chooses against the reduction in value and for the loss involved 
when the vessel is sold at one third or one fourth of its original 
cost. So long as the circumstances are fully known to all con- 
cerned, this system is as honest as the other, for the partners are 
aware that they have been enjoying only a terminable annuity. 

In municipal undertakings, carried out by public borrowings, 
there is an enforced sinking fund in the statutory condition that 
the loans be paid off in a given term, ranging from about twenty 
to sixty years, according to the nature of the enterprise. Unless 
repairs and renewals are liberally made out of revenue, such a 
sinking fund may prove insufficient, for the plant may have 
become obsolete or worn out before the end of the term. The 
tendency is to still further reduce the term where the assets are of 
a doubtful kind so as to safeguard not only the interests of the 
lenders, but those of the ratepayers who are responsible for repay- 
ment. For instance, in the case of loans raised for the specific 
purpose of purchasing existing horse trams a term of fifteen years 
has been prescribed, and that portion, — often considerable, — of a 
loan applied to the obtaining an Act of Parliament or to other 
preliminary expenses has to be repaid in five years. 

Those engaged in manufacture will often plead that deprecia- 
tion systems, good in theory, are impossible for want of funds. In 
other words, the annual writing down of values is a luxury which 
must be confined to prosperous concerns and limited for others to 
good years when surplus or exceptional profits are available. Not 
only, it is urged, must wages and other obligatory outgoings be 
met, but those engaged in the management, whether servants or 
partners, must be duly remunerated, and there may be nothing left. 

/Obviously, if sufficient be written off every fifth year, the 
capital may be as well, though not so symmetrically, maintained 
as by annual adjustment, but, at any rate, no delusion should be 
allowed to remain in the books of account. Plant does not cease 



FACTORY DEPRECIATION 59 

to deteriorate because it has been worked without a profit, or even 
if it has been idle. If nothing has been set aside to meet the 
lessening value, the impoverishment is the same, though not so 
manifest, as if the more positive act of withdrawing savings from 
the bank had taken place. In circumstances such as these, share- 
holders must submit to the loss of income, and, when trade 
revives, must be content to forego some of the improved revenue 
till the capital of the concern has been restored. Whether they 
are bound to do so depends partly on the agreements of partner- 
ship or articles of association as were just referred to in the case 
of wasting assets. 

Neglect of depreciation may, for a time, show no ill effects, 
especially in the early years of a newly equipped factory. Why 
should machines showing no signs of deterioration, and which 
perform their work as well as formerly, be written down in value? 
The young man of twenty-five sees little good in life assurance; 
he is as fit to-day as he was a year ago, and the matter will keep. 
He is, however, a year nearer his end, as he will find on inquiry 
at the insurance office, where the most robust health will not save 
him from the increased rate of premium due to his age. 

Although liberal writing down of values may, in the books of 
account, show diminishing assets, the proprietors are none the 
poorer because of book entries. If unduly depreciated, the true 
value will revive in a new valuation. If a proper system of depre- 
ciation be inaugurated, it will be necessary at each annual review, 
in order to show assets equal to the invested capital and liabilities, 
to set aside some of the earnings of the year to make up for the 
depreciated value of the plant. 

It is not necessary here to describe methods of bookkeeping. 
Due accord between the auditors and the works-manager, both 
experienced in such examination, will allow of a moderate, but 
sufficient, allowance. When the time comes for purchasing new 
tools it may be urged that they are to increase the output, and not 
to replace machines that are worn out. Even if this be true, 
the new expenditure will only balance the lessened value of some 
obsolete machine or plant which is almost always to be found in 
or about a factory. There are some machines that never wear 



60 LECTURE NOTES 

out. They may be so strong and heavy that the operations of 
working have no perceptible effect on them; they may even be 
special tools worked only a few times yearly. A slight change in 
the nature of the trade or improved methods of working may still 
further reduce the number of occasions when the old machine can 
be used. Is it to be supposed that in case of liquidation such a 
machine will have any considerable value? 

Portentous changes are looming over many engineering works. 
The importance of fuel economy is growing. If, as is already 
demonstrated, the modern gas engine is to afford power with one 
half the fuel consumption of the best steam engine and at one 
fourth the average consumption in the average factory, where are 
the funds to come from for the gas producers and gas engines if 
the steam engines, boilers and chimneys, which must perforce be 
discarded, stand at a high value in the books? 



THE COMMERCIAL SIDE OF ENGINEERING 

By 
Walter M. McFarland 

The question of how much a machine, or structure, or engi- 
neering work will cost, and whether it will pay, is almost always 
the one which decides whether it will be undertaken or not. Im- 
portant as this point may be, it is often neglected by engineers 
of the very highest ability, so that among well-informed profes- 
sional men it is very common to hear it said that the works of 
certain engineers are always sure to be the very best, but that 
they need a gold mine back of them to pay for the designs. 

One often hears people say, laughingly, ''The best is good 
enough for us" ; but it may be questioned very seriously whether 
in engineering we might not, with reasonable limitations, reverse 
this and say that ''good enough is best." 

As illustrating this last point, a monumental example was the 
great Ferris wheel at the Chicago Exposition in 1893. The par- 
ticular point is with respect to the way in which the wheel was 
driven. The wheel was about 250 feet in diameter, and an ideal 
way to have driven it would have been by a worm, which would 
have made the motion absolutely smooth ; but the cost of cutting 
worm teeth on such a huge wheel would have been absolutely 
prohibitive. Another method would have been by a wire rope 
drive with a drum on the shaft; but this latter was about 150 feet 
up in the air, and if the rope had chanced to break the unfortu- 
nate passengers would have had to stay in the cars until repairs 
could be made. 

Mr. Ferris devised a very much simpler plan, which many 
may have considered extremely rough; he made the device a 
huge sprocket wheel by notching the rim when it was cast, and it 
was driven by a sprocket chain down on the ground, where the 
parts could be constantly watched and inspected, and if anything 
did go wrong, repair could be made almost immediately. As a 
matter of fact, it is believed that there was never any accident to 



62 LECTURE NOTES 

the driving gear and that people were never troubled by having 
to remain in the cars. 

Several years later another wheel, even larger than the one at 
Chicago — about 300 feet in diameter — was set up at Earl's 
Court, in London. The engineers did not believe that "good 
enough is best," but put in a wire rope drive. The rope broke 
on several occasions, and people were compelled to remain in the 
cars from twelve to sixteen hours. To the writer, Ferris' engi- 
neering appears first-class; it accomplished the object satis- 
factorily and cheaply, and was an entire success. 

Another instance of what may be considered commercial con- 
siderations as affecting pure engineering was in the case of the 
machinery of naval vessels during the American Civil War. Mr. 
Isherwood, who was then engineer-in-chief of the United States 
Navy, was one of the greatest engineers whom America has ever 
produced, and was, indeed, a leader in the scientific appreciation 
of the true thermodynamic conditions connected with steam 
engines. He appreciated very much better than almost anyone 
else at that time the economic limitations of expansion, so that 
the action he took with respect to the engines he built was with 
full knowledge of what he was doing. The engines which he 
turned out were extremely heavy, and have been criticised at 
times by ordinary designers for this supposed defect, as well as 
for the use of only a very moderate range of expansion. The 
engines were made heavy because the increase of the navy created 
such a demand for engineers that it was impossible to supply an 
adequate number with thorough training, the consequence being 
that the machinery often went into the hands of quite unskilled 
people. Far more important than any question of weight was the 
vital one of being certain that the machinery would not break 
down. This was why the engines were made so very heavy, and, 
as a matter of fact, they did not break down. 

The reason for using only a very moderate degree of expansion 
was to secure simplicity of valve gear; a higher ratio of expan- 
sion also would have meant very much larger and heavier 
machinery. It required a good deal of courage on the part of an 
engineer to go counter to prevailing views and general ideas, but 



THE COMMERCIAL SIDE OF ENGINEERING 63 

Isherwood's machinery admirably filled the purpose for which it 
was designed. 

Another illustration of the effect of commercial considerations 
on engineering design is shown by a comparison of the applica- 
tion of forced draught for boilers in war vessels and in merchant- 
men. In the former the full power involving maximum forced 
draught is used only occasionally, perhaps not 1 per cent of the 
time the machinery is in operation, while in the merchant service 
the engines are used at full power almost the entire time. In war 
vessels weight and space are extremely precious, so that questions 
of economy receive minor consideration. The result is that in war 
vessels both engines and boilers are designed for good economy 
at about full power under natural draught, the consequence being 
that the boilers, as well as the engines, are too small for economy 
under forced draught. This is thoroughly appreciated by the 
designers, but to provide engines and boilers which would give 
high economy under forced draught conditions would necessitate 
probably 25 per cent more space and weight, which are simply 
inadmissible ; and, further, the machinery would then be so large 
that it would be very uneconomical at cruising speeds. 

In the merchant vessel, as the conditions are uniform and full 
power is demanded all the time, both engines and boilers are 
designed for maximum economy under these conditions, and as 
weight and space are not so precious there as in the war vessel, 
the proportions can readily be made adequate to the desired 
result. 

The effect of commercial conditions is also seen by comparing 
the Atlantic express steamers with cargo steamers for very long 
voyages, such as from England to China and Australia. In the 
express steamers very high speed is demanded by the traveling 
public, who are prepared to pay for it, so that while a fair degree 
of economy is desired and obtained, it would not pay to go to 
the complication which is reasonable for the long-distance ser- 
vice at slow speed. As showing what is necessary to get these 
extreme economies, reference may be made to the steamers 
Inchdune and Inchmarlo, which have given a horse power for 
slightly less than one pound of coal. These vessels used super- 



64 LECTURE NOTES 

heated steam, a tremendous ratio of heating to grate surface in 
the boilers, and numerous appHances necessary for the utmost 
economy, but these made the machinery very heavy and bulky 
for the power developed. As the total horse power of these 
vessels was not very great, it was practicable to resort to these 
measures, particularly as the increased space and weight for the 
machinery would be compensated for by the reduction in bunker 
capacity needed for the very long trips which they make. In the 
case of the Atlantic express steamers, however, whose trips be- 
tween terminal ports do not exceed a week, and where coal is 
abundant and cheap at both ends, it would not be good commercial 
engineering to adopt all these economical appliances with the 
attendant complication and possibility of derangement, because 
in these vessels high speed and absolutely reliable passages are 
more important than economy. 

One does not hear quite so much about it now, but from ten 
to twenty years ago American railway practice was much derided 
by British engineers. The roadbeds, bridges and rolling stock 
were all said to be absurd, and the splendid stone bridges and 
finely ballasted roadbeds of the British railways, and their loco- 
motives which would, with care, run forever, were held up as 
examples to follow. Anyone, however, with an open mind, and 
especially if he believed that the motto "good enough is best" was 
worthy of some faith, would have seen at once that there was a 
tremendous difference in the circumstances surrounding the two 
cases. In Great Britain there were short distances and a dense 
population, and wood was relatively expensive. America was a 
country of magnificent distances, a sparse population everywhere, 
and an exceedingly scanty one in many places, and with a supera- 
bundant supply of wood. If the railways were to pay at all, 
they must be built cheaply and with low-priced materials. 
Hence, the rough track equipments and the wooden bridges. As 
time has gone on and the country has become more thickly settled, 
and the price of steel has enormously decreased, we find very 
much better roadbeds and steel bridges taking the place of 
wooden ones, while in some cases stone bridges are also used. 

With respect to the locomotives, American engineers are not 



THE COMMERCIAL SIDE OF ENGINEERING 65 

yet willing to admit that the British engines are better, although 
they certainly do last longer ; but that is largely due to the differ- 
ent points of view of railway management on the different sides 
of the Atlantic. American managers believe in working the 
locomotives ''for all that is in them," with the idea that if a loco- 
motive lasts ten years that period will have sufficed for important 
improvements which would relegate it to an inferior position, so 
that if it is worn out in ten years it may be thrown away and a 
new one put in its place. 

The effect of density of population on engineering design is 
seen also in marine work. Even slight attention to the shipping 
in the Atlantic and in the Pacific Oceans will emphasize the fact 
that the very fast steamers are in the Atlantic and ply between 
New York and the ports of Great Britain, France and Germany. 
Indeed, for a long time it was the custom when a vessel was 
superseded for the Atlantic service to send her around to the 
Pacific. The reason for this is quite evident to anyone familiar 
with the cost of high speeds. These are impossible commercially 
except in very large steamers, and even there they mean a tre- 
mendous expenditure in first cost for hull and machinery, while 
the cost for fuel and wages is also very high. Meeting all these 
costs is possible only where there is a very large and constant 
passenger traffic, and obviously this occurs only between New 
York and the principal ports of Western Europe. In the Pacific 
the distances to be traversed are about twice as great, and the 
number of people who can afford to pay the price of high speeds 
is very limited. 

A great many things affect the development of any industry, 
and it would seem that results sometimes come about rather 
indirectly. Besides the large, very fast passenger steamers in 
the Atlantic, there has lately grown up a class of vessels, some of 
which are the largest afloat, but which run at much slower speeds, 
such as the Celtic and Cedric, of the White Star Line. Chrono- 
logically these ships came after the big express steamers, and it 
would seem that they are the result of two commercial considera- 
tions, one, that the number of very high-speed express steamers 
which could be supported is limited, and the other, the scientific 



66 LECTURE NOTES 

fact that it is much cheaper to transport cargoes in very large 
vessels than in small ones. In addition to the fact that it takes 
a smaller power per ton of displacement to get the same speed in 
the large vessel, the weight of machinery and of fuel is a smaller 
percentage of the total displacement, so that a ton of total 
displacement may not only be transported for less, but this ton of 
displacement has a larger fraction of useful load carried. A 
point in connection with this, of slight historical interest, which 
those who are of an antiquarian turn of mind may look up, is that 
some twenty odd years ago a tonnage law was enacted in Great 
Britain which provided that, in reckoning the tonnage for dues, 
there were certain exemptions on account of spaces occupied by 
machinery and other things. Some clever constructor, in study- 
ing over this matter, found that by modifying the design of the 
ship the amount of useful carrying capacity could be considerably 
increased without increasing the measurements on which the dues 
were fixed. This led to an actual change in the design of a great 
many vessels purely on this account. Considered as pure engi- 
neering, this change was bad. This is not a point worthy of 
commendation, but it emphasizes the important effect which com- 
mercial considerations have on what might otherwise be con- 
sidered a purely engineering matter. 

While discussing steamships, attention may also be given to the 
special type of vessel employed on the western rivers of the 
United States, the stern-wheel boat with engines that are con- 
sidered archaic by engineers whose experience has been on the 
deep waters of the ocean. This type of boat is mainly engendered 
by the conditions which it has to meet, but the commercial aspect 
here also is important. The engines are non-condensing, and 
seem to defy all the usual laws of economy ; but coal in the local- 
ities where they run is generally quite cheap, and the dangers to 
which they are exposed from sand bars, snags, etc., are very 
great. Indeed, it is usually anticipated that their lives will not 
be very long, and consequently it is necessary to build them just 
as cheaply as possible. It is interesting to note, in connection 
with this, that Stanley, in his book, "In Darkest Africa," has a 
good deal to say about two boats used in his expedition, one a 



THE COMMERCIAL SIDE OF ENGINEERING 67 

stern-wheeler, and the other fitted with propellers. Stanley was 
not an engineer, but his comments show the difference in adapta- 
bility of the two types. The screw boat was nearly always in 
trouble, while the stern-wheeler gave very little. 

There is, in the case of the Great Eastern, a monumental illus- 
tration of the fact that a machine or structure may be almost 
perfect from the purely engineering side at the date of its comple- 
tion, but a failure commercially. She was, for more than a gen- 
eration, the criterion as to great size in steamship construction, 
although she has been surpassed by a number of the great 
steamers of to-day. She was a failure commercially because she 
was built long before the days of economical engines, and when 
it is considered that to make about sixteen knots her coal bunker 
capacity was about 10,000 tons, while the modern flyers have 
nearly half again as much speed and carry only about half as 
much coal, one of the reasons for the failure may be appreciated. 
It is probable also that the weight of her machinery to make 
sixteen knots' was as great as that of the modern flyers to make 
nearly half as much again. 

In stationary practice it will often be found true that the most 
economical plant in steam and coal per horse power may not 
necessarily be the cheapest to use. In a certain case, the specifi- 
cations called for a plant with the avowed intention of getting the 
utmost economy in the production of power. The plant has been 
built and is a great success and a beautiful illustration of fine 
engineering. In this particular case the purchaser did not have 
to consider the question of interest on first cost ; but had the plant 
been for an ordinary industrial establishment it would really not 
have been the best engineering, with commercial considerations 
taken into account. Indeed, a very much cheaper plant would 
have answered the purpose, and an analysis of the data indicates 
that a plant which would have used half a pound of coal per 
horse power more than this economical one could have been put 
in for enough less in first cost so that the interest on the saving 
would have much more than counterbalanced the increased cost 
of coal. 

Commercial considerations are constantly at the front in elec- 



68 LECTURE NOTES 

trical engineering. This is the day of transmission of power over 
great distances by means of electric currents generated by water 
power in distant places. The question which confronts the de- 
signer from the very start is the cost of copper. He is not per- 
mitted to choose a size of wire for his transmission solely from 
electrical considerations, but he must ever bear in mind the effect 
of the investment in copper on his interest charges. 

Only recently in one of the leading electrical journals a frank 
discussion appeared of a case where it had been proposed to 
establish a power plant near some coal mines and transmit the 
power forty or fifty miles to the place where it was to be used. 
It happened, however, that the country between the two points 
was quite level, and there was already a railway, so that it was 
found, on balancing the costs, that it was cheaper to haul the coal 
from the mines and have the plant near the place where the power 
was to be immediately applied. 

A discussion has been going on for some years as to the 
possible displacement of the steam locomotive by electric service, 
and there is at present by no means an agreement as to just 
what the outcome will be. Enthusiasts on both sides can figure 
out results to suit themselves, but the present outlook seems to 
be at least settled that for branch lines electricity is almost certain 
to supplant the locomotive. However it may be with the great 
trunk lines, there has been a remarkable development of inter- 
urban electric railways which either traverse regions which the 
steam roads have neglected, or in many cases parallel the steam 
roads at a very short distance. The curious thing in the latter 
case is, that usually, without any falling off in the traffic on 
steam roads, the electric roads are able to carry a very much 
greater number of passengers at a decided profit. This seems to 
be an instance of the commercial aspect of the case being met 
better by the electric system than by the locomotive. It is 
obviously uneconomical to haul a single car by a steam locomotive, 
but it is quite the reverse with running single cars electrically. 
This enables a very much more frequent schedule to be given 
by the electric road, and a service which, on the whole, is very 
much more convenient and satisfactory. 



THE COMMERCIAL SIDE OF ENGINEERING 69 

Referring again to the point that "good enough is best," mean- 
ing that what will answer fully the requirements of the case is 
best, even if in itself not the highest product of the art, we may 
consider the case of certain manufacturing conditions. There 
are lines of manufacture where the principal use of steam is for 
heating rather than for developing power in an engine, although 
engines of considerable power are needed. Now, as is well 
known, the total heat of exhaust steam is but little less than that 
of the live steam from the boiler before admission to the engine, 
so that for heating purposes it is just as useful. This idea has 
been utilized by taking the exhaust steam from the engines 
instead of live steam from the boilers for the heating necessary 
about the works. In many cases the amount of steam necessary 
to produce the heating effect is considerably greater than would 
be supplied by the exhaust of a very economical engine, so that 
in such cases it is decidedly better engineering to use a cheap and 
wasteful engine, as far as steam economy is concerned, rather 
than an expensive and economical one. Speaking roughly, the 
power of the engine is obtained for nothing, so that this really 
does not enter as a factor at all, and consequently the cheapest 
engine which will do the work is the best one to use. 

There are cases also where steam is used direct from the 
boilers for heating purposes and where the question comes up 
whether to use a cheap boiler which will make wet steam or a 
highly efficient boiler which will make very dry steam. In 
ordinary work, for use with an engine, the latter is, of course, the 
one to be chosen ; but where all the steam is to be used for heat- 
ing, the cheap boiler that makes wet steam is the better. 

An interesting case where the commercial aspect should be the 
deciding one is that of steamships for ice breaking only, in the 
harbors where there may be only a few days in the year when 
they are used. It must be obvious on a little consideration that 
steam economy in such cases is absolutely unimportant, and that 
the first cost of the plant is the thing which should rule. This, of 
course, means that the cheapest machinery which will do the 
work, and be reliable, is that to be chosen. 

The machinery for waterworks pumping engines offers a field 



70 LECTURE NOTES 

for consideration of the commercial aspect. If the pumps are 
located in a district where coal is very cheap, it is easy to see that 
elaborate refinements to secure great steam economy may repre- 
sent a financial loss, while on the contrary, where coal is high, it 
pays to get the most economical machinery. In other words, the 
engineer when scheming his general plan of machinery ought to 
make up comparative statements which would include not only 
the cost of fuel, but the interest on first cost, and allowance for 
depreciation, repairs, etc. The machinery which represents the 
lowest aggregate of these annual costs will be that which is best 
to use. 

We have already considered one particular in which the com- 
mercial aspect of the case has a strong bearing in electrical engi- 
neering, but it is probably safe to say that in almost every case 
of the use of electricity this commercial aspect requires careful 
consideration. This is for the reason, speaking broadly and 
roughly, that electricity, as such, cannot be stored. Of course, 
we have the storage battery, but we cannot store electricity as we 
do gas or water, for example. The result of this is that the 
capacity of a station must, in general, be great enough to answer 
the maximum demand upon it, and thus the nature of the load 
and the relation of the average to the maximum load have a vital 
importance in fixing the rates to be charged for current. Where 
the load is entirely for lighting, the maximum demand lasts for 
a short time only, so that for the bulk of the twenty-four hours 
the plant is running at only a fraction of its full capacity. This 
means that the rates charged must be high. 

If the plant is in a district where there is also a great deal of 
manufacturing, a day load may be obtainable which will 
materially raise the average load and may permit a lower rate to 
be charged for lighting. In any case, the rate for power can be 
made much lower than for lighting, so as to induce consumers to 
take the current. This matter has been given the most careful 
consideration by all central station managers, and has led to the 
design of what is known as a maximum demand meter, which 
records not only the total amount of current used during the 
month, but the maximum amount used at any one time. It is 



THE COMMERCIAL SIDE OF ENGINEERING 71 

obviously only fair that the charge for current should be based 
partly on the capacity which the consumer requires, as well as 
on the amount of current he actually uses, and the rates are so 
adjusted that, for the same total amount of current taken, the 
price is much lower when the maximum demand is low than when 
it is high. 

The storage battery is used in many cases of a fluctuating 
load to tide over the peak and thereby enable a smaller investment 
in engines and generators to accomplish the same result. Storage 
batteries are, however, expensive, and of relatively short life, so 
that while offering a solution, it is not a wholly satisfactory one. 

An interesting illustration of the effect of commercial con- 
siderations was recently brought forward in connection with a 
scheme for a long-distance power transmission plant in Mexico, 
where the success of the scheme depends on the combination of 
an almost constant day load for a long period with a lighting 
load. It was proposed to install a power plant at a waterfall 
more than a hundred miles from the City of Mexico, which 
would supply current for the lighting of the city for about five 
hours every evening. During the other nineteen hours it was 
planned to utilize practically the entire power of the plant for the 
service of one of the railways. There are a number of com- 
mercial considerations in this case, one of which is the high cost 
of coal in Mexico ; but it is obvious at once that it would be com- 
mercially impossible to transmit current more than a hundred 
miles for lighting alone. It is also interesting, in connection with 
this question of the effect of a constant load in making low prices 
possible, to notice the result of the installation of the great 
electric plant at Niagara Falls. When first started, the current 
was used chiefly in Buffalo and for the railway between Buffalo 
and Niagara Falls ; but gradually an industrial community near 
the falls has been developed, for the reason that a number of 
electrolytic industries which take an absolutely constant amount 
of current for the whole twenty-four hours, have found it 
economical to locate their works within a short distance of the 
power plant. To these concerns the cost of power is the most 
important element, and as they give an absolutely constant 



n LECTURE NOTES 

demand, the power company can afford to make very low rates 
for them. 

One of the features of this age of close economies is the 
manufacture of articles in standard sizes and strictly to gauge so 
that the parts are interchangeable. This is a case where pure 
engineering and commercial engineering often conflict. To manu- 
facture cheaply it is absolutely necessary to manufacture in large 
quantities, and obviously this is possible only when standard sizes 
alone are made. This means that when the design has been com- 
pleted and the patterns have been made the rest is repetition 
work, and the cost of this preliminary work can be distributed 
over a large number of units. 

The tendency of pure engineering is to get out a design for 
each particular case that arises which will be the very best for 
that particular case, considered from a purely engineering stand- 
point, and without regard to cost. It is almost invariably the rule, 
however, that the special designs or the special sizes required will 
make the cost of the installation considerably more than if it 
had been made up of standard units. There is another side also 
to this question, namely, that standard sizes represent matured 
experience. When the first units of a new size or design come out, 
the manufacturer watches them carefully, and if any defects 
develop or if any points arise where improvement is possible, 
these will receive attention. After a short time, barring radical 
developments in the line of work, the design is as good as it can 
be made. If a consulting engineer either gets out a new design, 
himself, or wants the manufacturer to get out a new design, 
there will certainly be some features which are, to some extent, 
experimental, so that the new machine, made exactly to fit the 
particular circumstances, is hardly deserving of the same con- 
fidence as the standard one. 

One of the most notable illustrations of the benefit of standard 
sizes and standard methods of work, because it created such 
tremendous excitement in Great Britain, was the contract for the 
Atbara bridge in Africa, which was obtained by the Pencoyd 
Iron Works of Philadelphia, in competition with the world. The 
bridge was needed in connection with Kitchener's operations 



THE COMMERCIAL SIDE OF ENGINEERING 72> 

against the Mahdi in Africa, and it was highly important that 
the structure should be completed in the shortest possible time 
after the tenders were asked. Owing to the system with Ameri- 
can bridge builders of putting up standard spans, all parts of 
which can be quickly manufactured and are sure to go together 
properly when delivered at their different destinations, the Pen- 
coyd Company was able to guarantee a time of completion very 
much below anything which was offered by European manu- 
facturers. The bridge was actually completed somewhat within 
the time they had guaranteed. 

European practice for bridges has been to consider each case 
by itself and arrange for the number of spans, their length, etc., 
just as if duplication of previous designs were not to be con- 
sidered. From the standpoint of pure engineering, without regard 
to commercial considerations, this would probably be the best 
way ; but there is no question that the American method gives a 
cheaper bridge which fully answers the requirements, and which 
can be delivered and erected very much more quickly. 

One of the special advantages of building standard sizes is 
that repair parts can be obtained promptly and cheaply. In some 
lines of work this is a matter of vital importance, because from 
the nature of the service the machines do not get very frequent 
inspection, and when anything has to be replaced it must be done 
quickly. Where the machines are standard, the manufacturer, as 
part of his regular work, always has quantities of all the indi- 
vidual parts in stock, so that he can ship them upon receipt of a 
telegraphic order. Where the machines are special, he cannot, 
of course, afford to keep spare parts in stock on the chance that 
an order may come some day; this would represent the locking 
up of too much money if the plan were carried out on a large 
scale. This same objection applies to the purchaser keeping spare 
parts in stock, for it represents the locking up of his money. 
Where standard machines are bought, there is every benefit to the 
purchaser and with a minimum of cost to all parties concerned. 

There has been, as we know, ever since machinery existed, a 
constant tendency to replace hand work by machine work, and 
while this sometimes means temporarily throwing out of work 



74 LECTURE NOTES 

men who have been following the old line, it undoubtedly assures 
progress in the long run. Indeed, in many cases it is easy to see 
that it has saved men from extremely laborious and dangerous 
occupations, in such work, for example, as charging blast and 
steel furnaces. While the carrying out of this idea is largely a 
matter of invention, nevertheless opportunities come to almost 
every engineer to do something along these lines himself. But 
here again the commercial aspect sometimes gives the intelligent 
designer an opportunity to show that the engineer appreciates 
costs as well as the manager. It may happen, and such cases 
have actually occurred, that the first idea of doing a piece of 
heavy work would be on some large machine, but by a slight 
change in design the same result can be accomplished by hand 
work ; not, indeed, the same work, but the same end. The actual 
amount expended in wages may be slightly greater, but the use 
of a large and expensive tool is obviated and this tool is left free 
for other work. 

Too much attention cannot be paid to the great benefit and 
strength in the work of design which come from an intimate 
knowledge of shop processes. The best design is not the one 
which looks neatest on paper, but the one which, while accom- 
plishing its intended result, can be manufactured most cheaply. 
A knowledge of pattern-making and molding will thus often 
enable the designer to provide for reasonable and proper changes 
in sizes with very little additional expense for pattern-making. 

The same is true about machining. Not every shop can afford 
to have a great bed-plate with portable tools such as have been 
installed in some large works, and it frequently happens that even 
heavy work must be set for various operations. If the designer 
bears in mind that often the cost of setting the piece properly is 
as great as doing the work of machining on it, he will look out 
that the surfaces to be planed, the holes to be drilled, etc., are so 
arranged as to cause as few settings as possible. 

When saying that an engineer might almost take as his motto 
"good enough is best," emphasis must be laid on "enough" ; in 
other words, he must provide adequately for the work to be done. 
For example, it is worth while to have the materials that come to 



THE COMMERCIAL SIDE OF ENGINEERING 75 

the works carefully inspected to see that they actually are all that 
they are claimed to be. Even from the very best establishments 
materials are sometimes sent out that prove defective, and it is 
only after the defects have been found that it is realized that they 
should have been given a more thorough inspection. 

It is worth while to take advantage of opportunities to get 
familiar with the processes of manufacture and with what might 
be called the capabilities of the market in lines not immediately 
connected with the work one is doing at the time. People do not 
always stay in one place, and the information thus acquired may 
be of great value elsewhere. In one case the superintendent of a 
large factory saved for his employer at least $50,000 a year 
through familiarity with other shop practices. Believing, as a 
consequence of this knowledge, that he might get some of his 
material more nearly finished than it had been previous to his 
taking hold of the matter, he took the question up with the 
manufacturers of the material, who acceded to his proposition 
almost immediately, with the saving mentioned. 

The young engineer should begin at an early day to familiarize 
himself with the question of costs and become as proficient in 
this subject as possible. This does not refer merely to costs of 
material nor even the cost of doing work in the shop, but to all 
the elements that go to make up the cost of the product as it 
leaves the factory. We must all realize that the price which is 
obtained for any article must include not only the cost of the 
material and of the labor spent on it directly, but of the indirect 
labor necessary for the production of power and light, as well as 
the cost of police and repair of buildings, the salaries of engi- 
neers, draftsmen, salesmen and of the officers of the corpora- 
tion. It is important to acquire familiarity with all these matters, 
because it may often happen that, when a question of reduction 
of expenses comes about, unless the matter is thoroughly under- 
stood, the pruning knife may be applied in the wrong place. 

Articles discussing factory cost in technical papers and maga- 
zines have a good deal to say about the relations between direct 
and indirect labor; but it must be noted in studying this subject 
that the distinction between the two is, of necessity, very largely 



1^ LECTURE NOTES 

arbitrary and based upon convenience and the nature of the 
business. It would seem at a hasty glance that in a business 
where the percentage of indirect to direct labor is less than in 
another it would mean greater efficiency, but this by no means 
follows. It is sometimes very difficult to charge certain kinds 
of labor directly to particular orders, and for this reason it is 
classed as indirect. 

For example, the tool manufacture and repair department of a 
large works will serve a large number of workmen employed in 
direct labor, and without a considerable amount of accounting 
it would be difficult to charge the cost to each particular order. 
The same is true of crane service, the services of the janitors, 
watchmen, etc. Then, again, it is easy to see that the expenses for 
drafting and pattern-making are sometimes difficult to 
properly allot. The immediate work in the drafting room 
and pattern shop may be for the first few machines of what 
are intended to be standards, and if this expense were charged 
entirely to the first few machines it would make their cost almost 
prohibitive. Hence, in many cases, this work, which is in the 
truest sense direct labor, is, nevertheless, classed under the head 
indirect. Attention is called to this point in order that, when 
studying this subject, there may be no mistake owing to making 
a comparison between cases which are not strictly comparable. 

A gentleman of great experience in manufacturing recently 
told the writer that he believed accurate cost keeping was very 
much less common than was ordinarily supposed, and that he 
had had opportunities, in competitive bidding in which his firm 
took part and where they knew from experience the absolute 
cost of the work, to observe that competitors were taking work 
materially below cost ; in some cases it actually led to the failure 
of the firms who had made the mistake. There is a great 
tendency in many places where the work done consists of build- 
ing rather large machines of varying sizes instead of repetition 
work on smaller things, to submit proposals necessarily based on 
estimate. Unless there is a careful system of costs, these esti- 
mates in many cases are merely guesses. 

Instances are common where estimates are based simply on a 



THE COMMERCIAL SIDE OF ENGINEERING 77 

price per pound of machinery, predicating these figures on prices 
for which other contracts had been taken on machinery whose 
weight was known. This is the very roughest kind of work, and 
it should never be done if it can be avoided. The reason prob- 
ably for not having accurate costs is that it is expensive to estab- 
lish an accurate cost system ; but it is easy to see that when busi- 
ness is carried on without an accurate knowledge of real costs it 
is quite possible for a single error in estimating to involve a loss 
greater than the expense of a proper cost system for a great 
many years. 

Along with the matter of costs, and closely allied to it, is the 
question of factory organization. With the present tendency 
towards large works the organization becomes very complex, so 
that it is really a huge machine, and just as we study to make all 
the parts of an actual machine work together harmoniously and 
for the utmost efficiency, so the same must be done with a great 
industrial organization. So important has this become that there 
are single experts and firms of experts who make a specialty of 
devising systems of organization, and while these experts can 
render valuable assistance in almost any case, the competent 
manager should be able to outline to them what is needed, leaving 
to them the elaboration of details. The experts have the advan- 
tage of experience gained from many lines of business, while the 
manager ought to know his own business more thoroughly than 
any outsider possibly can, however expert he may be. 

In the old, easy-going days of works organization there was 
too great a tendency to have high-priced men doing small work 
of a clerical nature, in addition to the main work for which they 
were employed, the idea being, apparently, that only a little of 
their time would be taken. With the modern methods the clerical 
work coming upon the foreman's office is quite large in amount, 
and if he had to do it himself it would mean that he would have 
to neglect, to a great extent, his real work. Most of this clerical 
work can be done by a boy or young man at very moderate 
expense, and it is true economy to relieve the foreman as far as 
possible of this clerical work so that he can give his time to actual 
production. 



78 LECTURE NOTES 

This applies also in the drafting room. At some of the large 
works there are in the drafting room several hundred em- 
ployees, and of this number about 20 per cent are clerks and office 
boys. It is found very much more economical to have a boy who 
is paid $35 or $40 a month run after drawings and blue prints 
and attend to filing them than to have this done by draftsmen 
who are getting $150 or $200 a month. 

Every engineer is now familiar with the fact that in all modern 
works of any size the making and repairing of tools is managed 
by a special department of the works. The "good old days," when 
a gang of men would stand in line waiting for their turn at the 
grindstone, have gone by. In a modern shop, when a tool needs 
grinding, it is sent to the tool department and another one, all 
ready for use, is obtained at once. It is easy to see how much 
more economical such a method is, for the preparation of tools 
is kept in the hands of people who are doing nothing else and 
who are necessarily much more expert than the general workman 
would be, while the latter does not waste time in waiting for a 
turn at the grindstone. Indeed, where the premium system of 
payment prevails, a workman would not be willing to wait for a 
turn to sharpen a tool, because that would mean lost time to him. 
The great benefit of the premium system is that it prevents lost 
time by making the men see the advantage to them of so arrang- 
ing matters as to have no "loose ends." The increased production 
does not mean harder physical work on their part, but more 
intelligence applied to the work. 



ADDRESS TO THE CLASS OF 1903 

By 

Charles F. Scott 

A significant condition exists in the field of technical educa- 
tion. Scientific and engineering courses, both in schools of 
technology and in universities, mark the great evolution in 
modern education. Although the facilities for this new kind of 
education are constantly increasing and expanding, yet the num- 
ber of students increases faster than funds and equipment. Not- 
withstanding this, graduating classes of increasing size are 
insufficient to meet the demands for technically educated young 
men. 

What are the conditions which have placed a premium upon 
graduates in engineering and have opened new opportunities to 
the young engineer ? A general view of the situation is contained 
in a letter, which I recently received from an engineer whose dis- 
tinct, though wavy, writing marks him as well past the meridian 
of life, which contains these sentences : 

"At the Philadelphia Centennial, twenty-seven years ago, we were all 
asking, 'What will the next one hundred years witness?' It has witnessed 
already more for science, engineering, and humanity than all that has been 
accomplished before, and is now in the throes of yet greater things, which 
it is developing with yet greater energy." 

We who are younger have become so accustomed to acceler- 
ating progress that we do not have the perspective by which we 
may appreciate the change which has taken place. But a new 
era has come. We live in a new civilization. It is the result in 
no small degree of scientific discovery and its application. I will 
not recount the steps which mark the evolution of the past cen- 
tury, nor will I indicate precisely how "the engineer, one skilled 
in the application of materials and forces of nature to the use of 
man," has been a prime factor in the evolution from savagery to 
civilization. The change from the stage coach to the express 
train, the hackney coach to the electric car, the shoemaker's bench 



80 LECTURE NOTES 

to the great factory, is illustrative and typical of the new order 
of things. Find, if you can, a single important material element 
in your daily life which has not in some way been vitally affected 
by the work of the engineer. The books we read, the food we 
eat, the clothes we wear, the houses we live in, our methods of 
heating, of lighting, of water supply, of travel, of communication, 
have all been transformed since the days of our fathers. 

It would be interesting to consider in detail the specific ways 
in which the development of different phases of engineering work 
have been effective in accomplishing useful ends. It is of inter- 
est also to generalize in order to determine the particular process, 
if such we may call it, by which engineering promotes progress. 
Consider first the methods by which the newest branch of engi- 
neering has become so effective. The result of the application 
of electricity may be summarized by saying, Electricity increases 
efficiency. The electric motor, for example, does little which 
may not be done by other means, but it propels cars, it operates 
cranes, it drives machine tools and printing presses more con- 
veniently, or rapidly, or cheaply, in short, more effectively than 
other agents. By reducing time and cost and increasing output it 
increases efficiency. In the same manner the great result of engi- 
neering is this. Engineering increases efficiency. It provides the 
instruments and the means and the methods by which the results 
of human activity are enormously increased. It increases the 
work a man can do ; it increases the wealth a nation can produce ; 
it increases comfort and well being; it gives larger and broader 
life. The building of a new bridge, or of a larger or more effi- 
cient engine, or of a more convenient office building — these are 
not merely individual things to contribute to the convenience of a 
few persons; still less are they to be considered merely as the 
means by which the engineer or the builder may derive remuner- 
ation. They are part and parcel of the great mechanism, of the 
intricate machinery of our modern life and they are as essential 
to its existence and its prosperity as are the buildings and power 
plant and tools in a great machine shop to the workmen who are 
making locomotives. Consider it in this light, young men, and 
the profession you have chosen is one whose calling is high and 



COMMENCEMENT ADDRESSES 81 

whose responsibilities are large. Do not lose sight of this broader 
view, do not become so absorbed in minutiae or in details that you 
miss the inspiration which comes from realizing the part which 
your profession and your work is to fulfill in promoting onward 
progress, for we are now "in the throes of yet greater things." 

A recent experience has particularly impressed me with the 
new rate of acceleration of the times in which we live. I have 
been privileged to visit Oxford's classic halls and to walk across 
the greens of Cambridge and beneath the line of overhanging 
limes. It is a wondrous presence — to visit these nurseries 
wherein for centuries the flower of England's strength has been 
nurtured and the thoughts and the ambitions which have made 
Anglo-Saxon greatness have had their birth. 

To me there was one thought preeminent, even to me, who 
spent his early years in an old university, the oldest in the North- 
west territory — it was the pervading sense of the ancient, the 
unchanged. Here were buildings dating back beyond the days 
of Columbus' voyage, here were halls and cathedrals bearing the 
insignia of kings and queens and heroes of England's history so 
far back that history almost merges into myth. Yet it all stands 
to-day as it might have stood then. One can imagine that Addi- 
son has just preceded us along the walk which inherits his name, 
or that Newton has just entered the door which has been indi- 
cated by the friendly Baedeker. The past is preserved, one sees 
scarcely an anachronism. Outside the walls there may be an 
occasional tram car or the electric light may dispel the old-time 
darkness, and down this little street with its peculiar turns and 
curves there are laboratory windows where the sight of test tubes 
and of dynamos may jar upon one's classic musings, but they are 
so exceptional that they are like the glimmering candle that 
intensifies the gloom. Pass on a square, enter another portal and 
there is nothing to dispel the dream that you have been trans- 
ported back for half a thousand years. 

If I return to my native Ohio and visit the institution nearly 
a century old, at Athens, and then my younger Alma Mater at its 
capital city, I do not feel at home, they are not familiar, for in 
buildings and facilities and faculty and students they have more 



82 LECTURE NOTES 

than doubled, they have twice doubled since I, who still count 
myself a young man, stood upon the campus on a beautiful June 
day to receive a diploma. The advance which a decade now 
records is greater than that in centuries of the past. Let us 
beware lest the thoroughness and the strength of the old enduring 
plan with all its charm which softens life are not lost in the new 
methods of the strenuous present. 

You are going forth to take up your part in the world's work 
at a time when the work of the engineer per se has attained new 
magnitude, new importance and a higher rate of advancement. 
It is at a time also when social and industrial affairs are in the 
midst of great changes and at a time when the work of the engi- 
neer is most fundamentally and intimately related to these great 
movements. The very conditions which underlie modern life, 
such as railroads, steamships, manufactories, power transmission, 
the construction of modern cities with concentrated, intensive 
social and business activity, all these come from the engineer. 
Modern cooperation, social, industrial, commercial, financial, are 
all the outcome, the results of the conditions which have been 
forming and crystallizing as the results of engineering work. 
Hence, the wider range, the greater responsibilities, the larger 
life of the present and the coming engineer. 

One of the important phases of the new order of things is the 
aggregation and combination of industries and of capital which 
characterizes every branch of business. It has been asserted that 
this is subversive of individual independence, that it restricts 
individual aspiration and advancement, that it is a dark cloud on 
the horizon of the college graduate. 

I have seen recently an extract from an address by Mr. James 
B. Dill, at the University of Minnesota, which deals with this 
question. He said: 

"I believe that the tendency to organization, to combination, has put a 
demand on the college trained minds, has put a premium upon the services 
of such men and has made it easier than formerly for the college graduate 

to get started and to succeed in the world The college man has come 

to the front with his trained mind and his trained body and to-day is 
pushing off the throne those men who have not had the advantage of 
college training. When the trust movement shall have steadied itself, and 



COMMENCEMENT ADDRESSES 83 

when it shall have eradicated those tendencies which are, apparently, in 
the wrong direction, when it shall have increased and strengthened those 
elements which are right, then the men in charge of the great combina- 
tions and in executive positions will be the men who not only have a 
knowledge of the business, but whose minds have been broadly trained 
and whose characters have been formed within university halls. The 
situation demands the employment of college men." 

The new method by which things are done on a larger scale 
calls for men of broadjer faculties, higher intelligence and ability. 
Larger things require larger men, larger undertakings open larger 
opportunities. 

There is another aspect of the modern movement in which the 
tendencies are not so clear. We know that civilization and co- 
operation go hand in hand. We recognize the fundamental 
economies which are the inspiration and the justification of the 
corporation as a financial and industrial institution. It is coming 
to be generally believed that in so far as its financial and com- 
mercial and engineering aspects are concerned, the trust is sound 
in theory, and that if it fail it is not because of wrong principle, 
but through misuse and abuse of that principle. But there is an 
element in the problem aside from that of finance, aside from 
that of engineering and of production, it is the human problem — 
the problem of the relations between men. I apprehend that 
there is a general feeling that the large corporation is not theo- 
retically sound from the social standpoint, that although it may 
lead to economies in production it does not conduce to general 
individual advancement and personal freedom. It is felt that the 
tendency is to elevate a few leaders and to group men into masses 
and to treat them in the aggregate and not as individuals. 

As engineers our training and experience teaches us that what 
is correct and sound in principle may, with favoring conditions 
and skill, be made successful in practice, and also that what is 
in principle unsound must sooner or later make way for some- 
thing new. It is fitting, therefore, that we should first determine 
what is the correct principle, the ideal thing in the movement 
toward combination, and then work toward that ideal. 

Let me quote in this connection from an address upon ''Man- 
Power," recently delivered before a club of young engineers in 



84 LECTURE NOTES 

a manufacturing company by Mr. T. C. Frenyear. After refer- 
ring to the democratic movement of recent years, the question is 
raised whether large organizations under the control of a single 
person are compatible with the freedom which a democracy 
should guarantee. After indicating that the word king originally 
signified the man of exceptional ability, the man who can, the 
address continues: 

"In democracy there is still just as much need for 'the man who can/ 
but he is no longer called king, and he is selected by natural, not artificial, 

processes We must have rulers, men of power, and they are 

selected not primarily by our ballots, but by the inevitable cosmic processes 
of evolution What is the true principle of organization in a demo- 
cratic community? It is this: Getting others to do what you want done 
while they are doing what they themselves wish to do; inspiring others 
with a desire to do what you want done, not driving them to do it. This 
may seem to be only a new form of slavery, but such organization 
develops men, brings them into effective relations. It is like building a 
useful and beautiful house of stones and bricks, by themselves of no use 
and little beauty. This organizing ability is a matter of power and may 
be abused for a time but not for long; it is essentially moral. We who 
are made, or at least are being made, in the image of God, come nearest 
to His likeness in organizing and doing great things with the aid of other 
men whose wills we inspire and by means of the materials and forces with 
which He has filled the world and which we have conquered. The instru- 
ments of true organization are hope, not fear ; ambition, not despair ; love, 
not indifference. The true master of men appeals to the high motives 
and aspirations ; creates an atmosphere which awakens and inspires ; is 
big, bold, powerful, and attracts and attaches to himself the wills of his 
men. Forces, things, men, are all the raw material out of which he builds 
vast structures, using each according to its fitness for his plan, but without 
violating either the laws of matter or the individuality and freedom of 



Such sentiments as these which I have quoted put a, new mean- 
ing into the movement toward organization and combination. 
These general questions are not separate and apart from the field 
of the engineer. They are vitally connected with his work and 
his interests. He who has paved the way by the development of 
material things for combination in financial and commercial and 
industrial affairs, which in turn have led to new social problems, 
has assumed new relationships and new responsibilities. He has 



COMMENCEMENT ADDRESSES 85 

furnished the machinery and the material appHances and facili- 
ties on which the great interests of the present are based. May 
not the methods and the principles and ideals which have proved 
successful in dealing with material things be applied also to those 
organizations which deal with men ? Has not this material basis 
of modern life been more successfully and skillfully and com- 
pletely established than its financial and political and social rela- 
tionships? It is unjust distribution of wealth and speculation, 
it is corruption in municipal and general government, it is conflict 
between laborer and employer that disturb and threaten. The 
engineer is in contact with facts, he has learned the value of 
truth. He knows and he respects physical laws. Effects follow 
causes quickly; failure is the certain consequence of false data 
or bad methods. But human affairs are more complex, failure 
cannot be so readily traced to its cause, the truth is not so evident, 
nor is it so respected, yet after a longer time it is just as surely 
final. The ideal underlying engineering work is efficiency — the 
production of the maximum result with the minimum of effort. 
The prevailing motive elsewhere is selfishness. Trace them back 
to their ultimate causes and you will find that the real danger in 
business is that which comes from greed, and the real cause which 
underlies the conflict between labor and capital is selfishness. 
The aim of the old-time military engineer was destruction, the 
object of the modern engineer is construction. Engineering be- 
came a new factor in world history when it severed itself from 
warfare. Who can picture the transformation when the prin- 
ciple of war and of selfishness in business and in social affairs 
shall be supplanted by higher and nobler and better motives? 
Then we shall find that the Golden Rule — the law of love — and 
the law of efliciency are one and the same. 

To you who are about to step forth from your Alma Mater 
there opens a marvelous opportunity. The work of the engineer 
has deepened and broadened. Not only are the various branches 
of engineering interrelated and interdependent in new ways, but 
the successful carrying out of the largest undertakings depends 
upon the concurrent effort of the engineer, the financier, the 
captain of industry, and the manager of men. He who can secure 



86 LECTURE NOTES 

the highest results is he who combines in himself the essential 
elements of leadership in many fields. Have an eye on the future 
of the football engineer who stands well in his classes. 

I repeat, the underlying material basis of the past century's 
progress and of present prosperity, of the evolution in commercial 
and industrial and social conditions, of modern cooperation, is 
engineering. But not only has engineering work made them 
possible by giving them a material basis, but the modern corpora- 
tion should be operated upon engineering methods, and modern 
society should have as its ideal the engineering principle of effi- 
ciency. Economy alone justifies the modern business corporation 
— every one of them needs engineers to lay the foundations for 
economy of production or of operation. The future calls for 
engineering work greater in amount and higher in kind, it calls 
also for engineering methods and engineering ideals, it calls for 
men who can build bridges and engines and cities, it calls for men 
who can direct human as well as physical forces, it calls for men 
of strong character, inspired by high ideals who can transform 
modern life by engineering principles as well as by engineering 
practice and by so doing embody in our commercial and political 
and social life the simple principles of efficiency. 

Several months ago there was a day on which I heard many 
notable things said by many notable men. It was the inaugura- 
tion day of your new president. Representatives of trustees and 
faculty and alumni, representatives from universities and tech- 
nical schools, the Governor of your state, men from various de- 
partments of industrial and commercial and professional life gave 
expression to various phases of the engineering school and its 
product. I enjoin upon you that you preserve most carefully 
the copy of the Stevens Indicator which makes record of the 
addresses on the afternoon and evening of the fifth of February. 
I heard these addresses and I have read them again. I call your 
attention to what you may consider a rather remarkable omis- 
sion. Although there is running through these addresses a con- 
sideration of the technical school, of the influence which it 
should exert upon the young men who are under its care, and 
although there is specified over and over again the qualifications 



COMMENCEMENT ADDRESSES 87 

which the young men leaving the school should possess, yet there 
is scarcely an intimation as to the quantity or the quality of 
knowledge which he should have. But your aim has been to learn 
the theory and the rules of text-books, to become expert in the 
shop and laboratory, to pass examinations — it is upon these things 
that the approval of your instructors and the granting of your 
diploma has been based, but to these things scarcely a reference 
has been made by those who in after life express such high 
appreciation of the technical school and the technical man. I 
do not think that they discount either scholarship or knowledge, 
but they do emphasize other things. But it is not a question of 
what a man has taken in but what he gives out, what having 
absorbed and digested he knows himself and uses himself for 
results. It is not a question of the record one may have made 
in the gymnasium or on the athletic field, but the true value of 
the physical training is measured by the health and the strength 
which are available for use in active life. 



I have said that the training of an engineer fits him for other 
fields. Your own institution, when it sought a business man to 
strengthen and direct its financial interests, an executive to ad- 
minister its affairs, an educator to shape its policy, a man to 
stand as an example before young men, chose wisely when it 
chose for its president a son of Stevens, one who was by training 
and by profession an engineer. 



ADDRESS TO THE CLASS OF 1904 

By 

Walter C. Kerr 

It is a pleasure to talk to a lot of young men who are about to 
become engineers. It was not so long ago that I came to your age 
less well prepared, perhaps, than any of you. When I look back 
at the engineering education through which men of my time were 
launched, and then consider the training you have had and the 
opportunities before you, I have reason to wonder why I am here.' 

I hesitate to advise you. You have already had so much advice 
that I do not know whether you can hold more. What I can say 
in a few minutes will amount to little, so let me use these minutes 
to suggest that you advise yourselves along certain lines which I 
will propose by way of point of view. If you look straight you 
will see straight. You cannot think wrong and act right. Your 
perspective will be distorted if you haven't the right point of view. 

You are leaving a good institution for a good world. Your 
Alma Mater has built up around you excellent facilities for 
giving you what you need, and other institutions have likewise 
cared for their own. 

The so-called liberal education has always been highly aca- 
demic. Trade school engineering has been strictly non-academic. 
The two have joined hands fortuitously in our modern institu- 
tions. The liberal education has become less and the technical 
more academic, with advantage to both. There is, however, 
danger of engmeering education growing too academic, for several 
reasons. One is the disposition to include in technical training 
a liberal education, which of itself is not undesirable. Another is 
that engineering professors often lean unduly towards academic 
views and processes, and thus lose touch with the spirit of the 
engineering world. Greater than either of these is the tendency 
of all things to move in the line of least resistance, and all learn- 
ing which depends upon the intellect alone is more easily acquired 



COMMENCEMENT ADDRESSES 89 

than that which depends upon other sources. The proof of this 
need go no further than to remember that no literature is finer 
than that written two thousand years ago; no philosophy has 
fundamentally improved upon that of the ancients; the highest 
flights of intellect and mathematics were reached during the ages 
in which the world was observed to be composed of four elements 
— earth, air, fire and water. 

A review of knowledge shows the great preponderance of the 
intellectual over the material, and it is only within late cen- 
turies, in fact, almost the past century, that the human mind has 
seemed capable of turning from the lesser resistance of intellectual 
attainment to the greater capacity for physical observation and 
comprehension. We have but recently come to the era of intense 
mental operations, dealing with laws and principles which require 
insight greater than the intellect can grasp unless aided by the 
senses. Contrary, therefore, to common belief, I assert that the 
highest refinement of knowledge follows from the highest use of 
the senses ; and that it has taken thousands of years of pure intel- 
lectual development to attain a state in which the powers of nature 
can, through the human intellect, be made useful to mankind, 
and add largely to knowledge. Do not, therefore, get a wrong 
view of the faculties involved in science, in the application of the 
laws of nature, applied mechanics, and the powers of comprehen- 
sion which underlie engineering. There is still room for doubt 
— not debatable here — as to what constitutes liberal education. 

I hope for the time when the spirit of engineering as found 
in practice will form a more definite part of engineering educa- 
tion. This, I think, must come through the professor keeping in 
close practical touch with the engineering world. There are vari- 
ous ways in which this may be accomplished, but I know of none 
better than by each professor doing a reasonable amount of prac- 
tical work for commercial purposes. Under some conditions, this 
may be consistently accomplished during a portion of the time, 
but I am inclined to think that eventually our professors will de- 
vote all their time to instruction while they teach and go period- 
ically into the world, a few years at a time, for practice. Thus the 
professorial life would not be so exclusively educational, and our 



90 LECTURE NOTES 

growing engineering institutions would be enabled to enlarge 
their faculties by the devotion to teaching of a portion of the 
time of men who are primarily engaged in commercial work. 

Now that you have your so-called education, what are you 
going to do with it? I cannot tell you, but I can suggest some 
points of view. 

Begin by forgetting yourself. All thought of self is some 
form of selfishness, and selfishness never produced anything 
better than more selfishness. It often breeds something worse. 
Genius is all right in its way, but it will not do your work. Get 
a right idea of work. Remember that time is the essence of most 
things, and is not inconsistent with thoroughness. 

We hear much about opportunities. They are everywhere 
plentiful. Remember that your opportunity is the little one that 
lies squarely in front of you, not the large one which you hope 
to find further along. Many a man is surrounded with opportu- 
nities who never seizes one. There are traditions that Adam, 
William Tell, and Sir Isaac Newton each had an affair with an 
apple, but with different results. 

Your first duty is always to that which lies across your path. 
The only step which you can take in advance is the next one. 
This leads to a simplicity of action which is commendable. Don't 
ramble. 

The refinement of thought which is apt to follow high train- 
ing often leads the mind to overlook simplicity and to even seek 
complexity. The wealth of modern appliances tends likewise; 
and it is thus easy to acquire that over-refinement, often termed 
theoretical, as against the simplicity which is called practical. 

From one point of view all graduates can be divided into two 
classes : those who think their knowledge is a little long for their 
opportunities ; and, those who think most anything is a little long 
for their knowledge. Both are apt to think that the knowledge 
they have acquired will become the essence of performance. You 
will soon find that knowledge hasn't much to do with eifective- 
ness. It is necessary, only as words are essential to the expres- 
sion of thought. You will find knowledge a good tool, but not 
the vital force with which you perform. You will fall back upon 



COMMENCEMENT ADDRESSES 91 

human effort and action, and find that it is the human-engine and 
not the knowledge-engine that does the work. 

Cultivate singleness of purpose. This is more important than 
you may think. It is intuitive with the comparatively ignorant, 
and often absent in the highly trained. We are frequently sur- 
prised at the great competency of the ignorant contractor or fore- 
man, on whom judgment is often passed by saying that he is a 
practical man and gets results. Analysis will show that his best 
quality is singleness of purpose, which leads him to vigorously do 
the one thing before him, without distraction following from 
knowing or thinking about too many other things. The broaden- 
ing power of education and training increases the range of con- 
templation, but unless the power of concentration is cultivated 
there follows a tendency to scatter instead of to acquire that sin- 
gleness of purpose which leads to effective action. David Starr 
Jordan has said : 

"The purpose of knowledge is action. But to refuse action is to secure 
time for the acquisition of more knowledge. It is written in the very- 
structure of the brain that each impression of the senses must bring with 

it the impulse to act. To resist this impulse is to destroy it This 

lack of balance between knowledge and achievement is the main element 
in a form of ineffectiveness which, with various others, has been un- 
critically called degeneration." 

Thus President Jordan shows how even much more than a 
little knowledge may be a dangerous thing. The highly trained 
man therefore needs, as a complement to his training, unusual 
powers of concentration, in order that the virtue of singleness of 
purpose may not be lost. This faculty a man must have or acquire 
himself. It is not in the books. It cannot be taught. It can only 
be suggested by precept and example. 

From directness of purpose naturally follows diligence in 
getting what you go after, and not being easily turned aside by 
resistance. When you are getting what you go after, get it all. 
Avoid the mediocrity of compromise. Be thorough and stand 
for full competency in everything, from main essentials to details. 
Just so far as education, assisted by concentration, contributes to 
singleness of purpose it is useful, but where by length, breadth or 
depth it dilutes human effort, it lacks value. It is, therefore, not 



92 LECTURE NOTES 

so much the question how much educational training you have as 
it is how you use it. Some can use a Httle with great effect, 
because their point of view is right ; others scatter so badly that 
they cannot use their knowledge at all; while some distorted 
minds seem to have a faculty for misapplying a large amount of 
acquired knowledge through complicated processes full of error. 
To be right, you must be 100 per cent right. Charity may pardon 
human nature its percentage of delinquency, but this is a human 
matter. The laws of nature, mathematics, and engineering do not 
pardon anything. The man may therefore be absolved from cen- 
sure, but his work must stand the rigid test of inviolable law. 
Nor is it too much to say that you must be right the first time. 
Much of our engineering is done only once, and it must be done 
right that once. A man who has learned by experience to do a 
thing deserves no credit for doing it right. He is then only a 
repeating machine. Real power is characterized by ability to 
perform right the first time that which a man never did before. 
Such performance involves the power to assimilate and adapt ex- 
periences, of more or less like or unlike kind, in a way to bring 
forth correct results. This is the true use of experience, wherein 
a man is a thinking, active power, and not a mere repeater. 

Clearness of thought is an essential often lacking. This, too, 
follows from concentration and singleness of purpose. Many 
minds confuse themselves with a wealth of ideas, grading from 
the well-formed to hazy, indistinct conceptions. You can clear 
your mind by proper habits of thought. Train yourself to sepa- 
rate essentials and non-essentials and confine your consideration 
to the essentials ; to distinguish between what you know and what 
you only vaguely surmise, clearly eliminating opinion from facts. 
Nothing is more helpful than conference with yourself, in which 
you determine what you think of your own thoughts. This is 
aided by the moderate cultivation of system — thinking in an 
orderly manner, beginning at the beginning, ending at the end, 
and being sure to have a middle. With this there should be no 
slavery to system, but let each find his own logical way. 

Besides what are commonly known as ideas, men have intui- 
tions — sometimes called impressions or opinions — which they 



COMMENCEMENT ADDRESSES 93 

cannot readily prove. These I believe are identical with reason, 
except that while reason is composed of a sequence of distinct 
ideas, each capable of expression, intuitions follow from the 
capacity of the human mind to integrate small ideas and impres- 
sions, each of which is too small to stand alone, or to be readily 
expressed, but which integrated form a concrete mental impres- 
sion, called an intuition, and which is of exactly the same charac- 
ter as reason, except that it is composed of smaller and almost 
intangible units. Do not, therefore, discard intuitions as inferior 
to reason. Analysis will sometimes develop intuition into an 
expressible logical thought. 

You have all had ideas and you will have more of them. Some 
ideas seem bigger than others. These mental forces, like other 
forces, only do work when in motion. Hence your ideas are 
only valuable when put into execution, and this often requires 
more talent than to originate them. Some men seem to consider 
their ideas so good that they will execute themselves. 

A point of view is involved in the power to rationalize. This 
again is a thing which each man does for himself in his own best 
way, and its essence consists in asking one's self whether the 
thing is reasonable. It is a great check upon error. It applies 
equally to nearly everything of which engineering is composed. 
It is the power of the human mind, after performing in more or 
less systematic and conventional ways, to stand off and look at 
results and ask one's self whether they are reasonable. One man 
will figure that certain material weighs two hundred tons, and 
believe it. Another will say that there is something wrong in 
that, for it all came on two cars. 

Every young man comes sooner or later upon a dilemma, in 
which he is more or less drawn in opposite directions by his 
confidence on the one hand and timidity on the other; a desire 
to perform backed by the courage of his convictions, but on the 
other hand resisted by his inability to see his way through in 
orderly progression to a desired end. This is about the time 
to show your nerve. Don't be dazed and baffled, but make a 
start. Use your wits and you will get somewhere, and if you 
cannot always see the end it will constantly get nearer and 



94 LECTURE NOTES 

plainer when you go as far as you can see and then see how 
far you can go. 

Another point of view concerns engineering expression. This 
may be through designs, drawings, mathematical determinations, 
or words, and finally by work done. The lamest of these is 
words. All engineering is so non-literary in character that the 
use of language is too much neglected, leading to expressions 
that do not properly convey thought. In engineering, it is not 
rhetoric but diction that makes expression clear, and diction is 
best learned from the dictionary. It is well for a young engineer 
to cultivate his vocabulary, and learn to use words in their right 
sense. They are then usually understood, even by those who 
have less knowledge. A word of caution^ however, against 
assuming that a lack of facility of expression can cloak an absence 
of knowing what you think. Engineering documents, specifica- 
tions and letters are full of misstatements due to the careless 
use of language. Conciseness cannot be overestimated. Brev- 
ity is desirable, but not at the expense of clearness. Conversely, 
a certain degree of facility should be acquired in reading the 
words of others. Some seem incapable of understanding plain 
language when spoken or written. Anyone persistently failing 
to understand the language of others has limitations needing 
correction. 

One of the worst attributes in engineering, and which is 
fundamentally born of conceit, tends to fasten error, censure and 
responsibility on others. There are times when a man needs to 
stand himself up in front of himself and ask : What is the matter 
with me ? The capacity of any man to admit his own error and 
frailty of judgment is a measure of strength rather than weak- 
ness. 

Perhaps no personal attributes are of greater importance in 
the conduct of the business affairs of an engineering life than 
good cheer and non-contentiousness. Not only because these 
are right and agreeable, but because they enable a man to work 
better, to be better understood, and they add weight to his opin- 
ions. There is a certain reasonable optimism of manner which 
makes a man and his ideas welcome, even though they must of 



COMMENCEMENT ADDRESSES 95 

necessity sometimes be critical. To vote aye and believe that 
things can be done makes a man helpful to others and to enter- 
prises. Discontent is not a sign of progression. 

Each of you probably has a preconceived notion of following 
some line of engineering. Be careful about your self-analysis. 
The field is large and has room for all of the various types of 
men, some of whom incline to constructive operations, others 
toward inventive, some to the contemplative. Again, within all 
these divisions, some tend towards professional and others trade 
work. No one can advise what is best for you. This you must 
find out for yourself. I cannot help, however, a certain predilec- 
tion in favor of a young man being just an engineer, and not 
any particular kind of an engineer — not specializing while too 
young, but developing along versatile lines, ready to turn his 
hand equally well to any task within his general scope. In this, 
there is a good deal in the point of view, and the man who be- 
lieves he can apply himself in one direction about as well as 
another will come nearer doing it than one who thinks he cannot. 

When you start your practical work, you will doubtless try to 
improve things. That is a legitimate purpose, if not overworked. 
I am not going to attempt to tell you what needs improvement, 
but the one improvement that most things need is in the line of 
sufficiency. You can think this over for yourself and apply it 
where it fits. 

There is another point of view seldom considered. It relates 
to environment and the power to vary. It is pertinent to engi- 
neering. Man ascended through and exists under the laws of 
an organic evolution, which occurred almost entirely in early 
geological ages, under water, within a few miles of shore, under 
substantially constant temperature, constant pressure, and uni- 
form food supply, and thus in about the simplest possible envi- 
ronment. It was caused, primarily, through the force known as 
the power to vary, and the reason that evolution spanned the 
space from the simple cell to the vetebrate animal in so short 
a time was that this power was not resisted by complex environ- 
ment. When organisms emerged from the water to the more 
complex environment of the land, and as environment grew con- 



96 LECTURE NOTES 

stantly more intricate, its resistance retarded evolution and re- 
sulted in fixation of species until ordinal evolution practically 
ceased. It is the complexity of the environment of the world 
that presses upon you and tries to hold you back from the exer- 
cise of your native power to vary. A good environment is 
certainly less harmfully resistant that a bad one, but remember 
that environment is not a force. It is not a producer. You are 
the producer. Whatever be your power to vary, environment 
will only resist and reduce it. 

Therefore, remember that all the good you accomplish is 
going to come out of yourself. You cannot borrow it and you 
cannot make it out of that which has been poured into you by 
education or otherwise. All that you receive is only a certain 
quantity of knowledge, acquired by education, experience, or 
other training, which will have a certain influence upon what 
comes out of yourself as your own. It is the inherent capacity 
to perform with your own brain which will make you what you 
become, and not the mere transmission of that which you have 
acquired. Your knowledge, therefore, is of little avail until you 
make it inherently a part of yourself through mental assimilation 
and utilization. The clearer you comprehend these things, the 
more readily you can make use of them as against the process 
of mere acquirement with a vague notion that in some way 
or other what you acquire may be of benefit, or that environment 
will be the force that makes your talent effective. Some have 
gone through experience without acquiring it, and many a man 
who has received an education has not got any because he 
allowed it to be a thing apart from his personality and it slipped 
away. 



ADDRESS TO THE CLASS OF 1905 

By 
Palmer C. Ricketts 

To you, gentlemen of the Class of 1905, there is nothing stale 
or hackneyed in this moment. Many of you have been looking 
forward to it for years — certainly for the past four years. To 
most of you it means the end of your school life and the begin- 
ning of your life's work as engineers. It means to you victory 
also : the successful completion of a long and arduous course of 
study, of a course in engineering second to none in the land, the 
winning of a struggle requiring brains, energy and persistence, a 
struggle in which many looking forward to this day as their goal 
have fallen by the wayside, while you have been successful. 
You, then, are picked men standing upon the threshold of the 
future looking forward to a life of happiness and work. The 
rosy dreams of youth encircle you. The confidence of youth is 
yours. This is well. 

Have you ever stopped to think how fortunate you are, you 
who sit here to-day buckling on your armor? What a priceless 
armor you have to wear ! How few, how very, very few among 
the vast army struggling to-day toward the goal you seek — 
whether it be fame or honor or riches — have the weapons you 
have with which to do battle ! If never before, stop now — before 
you turn your faces for the struggle — and cast one backward 
glance of thankfulness to those without whose aid you would 
have been to-day only soldiers in the ranks, to your teachers 'who 
have worked faithfully to prepare you, but above all to your 
parents, who, through many years of love and care and self- 
sacrifice, have labored to give you advantages which perhaps 
they never had, so that you might be better fitted to meet the diffi- 
culties of life. They may feel themselves well repaid as they sit 
here to-day proud of your success. But you must not forget 
the part due to them. 



98 LECTURE NOTES 

Do not think that your education is completed. Do not make 
up your mind that you are through with your studies and that 
hereafter you will have to do only with practical work. You 
have completed only one period of your education, and if you 
wish to become professional men in the highest sense of the term, 
you must resolve to continue not only your practical work, but 
your theoretical education as well. I am aware that this is diffi- 
cult and that after working long hours during the day, you will 
find it hard to turn your mind to the more abstruse questions of 
theory, but you will make a great mistake if you do not do so. 
Knowledge is very rapidly increasing every day in all branches 
of engineering by an accelerated growth, and if you are to be 
successful in any specialties you must keep abreast of the 
advance continually being made in the direction in which you 
are more particularly interested. Your engineering education up 
to this time has been quite a general one. It will be well in the 
end, I believe, if circumstances permit you to spend several years 
of your early professional life in securing experience in different 
branches before determining upon the specialty or specialties you 
will finally pursue. The field is so broad and so quickly broaden- 
ing that you must come to a specialty in the end or work in 
branches closely allied. The division lines between the branches, 
however, are not distinct. Not only do the fundamental theo- 
retical principles of mechanics apply to all branches alike, but no 
one can confine himself to one branch of professional work 
without being familiar with practical applications common to 
others. For instance : in order to become, in the highest sense, a 
specialist in the design of the superstructure of bridges a man 
must have considerable knowledge of machinery as well as of 
hydraulic and metallurgical engineering. Certainly he must have 
more than a general knowledge of these subjects. 

You cannot, of course, absorb all the new material published, 
but you should study the more important new books in your 
specialties and read the more important articles in some of the 
principal technical periodicals. You should also join one or more 
of the leading engineering societies and should become familiar 
with their transactions. You should try to make the acquaintance 



COMMENCEMENT ADDRESSES 99 

of older members of the profession. You will obviously gain 
information by such association. Many of them will not hesitate 
to give you the benefit of their knowledge when you need it. And 
the wider your professional acquaintance the better it will be for 
you in many ways. 

In spite of your preparation and education, remember that you 
are ignorant. It is true that your technical training has given you 
great advantages, but remember that you really know very little — 
little not only of the vast store of knowledge outside of your pro- 
fession, but even of the practical side of your profession itself. 
Many a workman, ignorant from your point of view, can give 
you professional information of great value and of which you 
are absolutely ignorant. It will be well for you to remember this. 
You will be wise and grow wiser if you learn to watch closely how 
skilled workmen do their work, and if you are not too proud to 
question them when necessary. Above all, do not show pride in 
your knowledge, nor contempt for ignorance. A most valuable 
sentence to be remembered, certainly by a teacher and I believe 
by any one who has to deal with minds less mature than his own, 
is the remark made by one great Englishman of another : 

"He had none of that contempt for human ignorance which is itself one 
of the most provoking forms of ignorance." 

You will have learned a valuable lesson in the handling of men 
when you thoroughly learn this sentence and thoroughly under- 
stand what it means. Be patient with those of less intellectual 
quickness than yourself. I well remember the experience of a 
brilliant man — a technical graduate — who, without having passed 
through the various subordinate grades, had become the president 
of a certain large manufacturing company. He never could 
understand why he could not get along with the men. An 
observing friend of his told me why. He would pass through 
the works asking questions, and before a foreman or workman 
had half completed his answer, his quick mind had grasped it 
and he had passed on leaving the man agape and confused. If he 
had been more patient, with more tact, he would have been more 
successful as a manager. He would probably have been more 



100 LECTURE NOTES 

patient if he had begun in a subordinate position and had been 
compelled to work his way upward. Very rapid advancement is 
one of the most unfortunate things that can happen to a young 
engineer. Some of you may not think so from your present 
point of view. Later you will find this to be true. Nothing will 
so well fit you for the responsibilities of a high position as 
drudgery in the successive lower positions leading to it. In no 
other way can you master details essential to your success in 
places of responsibility. 

In professional life it is not necessary for a man to tell all he 
does not know. In my teaching when I begin with a new class 
I pick out first those students who do not answer decidedly, who 
are in the habit of qualifying their replies, who ''think so" or 
"guess so" or who put, in their voices, an interrogation point 
after their answers. I tell them they must change all this and 
show them the kind of impression they would make on a client 
if they "thought" or "guessed" when he came to them for pro- 
fessional advice. 

In your future work if you wait to do only those things which 
you have done before, you will never become leaders in your 
profession. Do not be afraid to take responsibility. You will 
develop all the more rapidly as responsibility is thrust upon you. 
It is necessary many times for an engineer, in the course of his 
practice, to take up work which he knows he could not do if it 
were to be done immediately but which he knows he will be 
thoroughly prepared to do when the time comes. Remember that 
work goes slowly, that difficulties come singly, that there will be 
time for reflection and that in this time you will be able to collect 
your ideas and study special points. One of the greatest advan- 
tages of an education like yours — I had almost said the greatest 
— is the confidence it tends to give you in your own powers. You 
know where and how to look for information you may have 
forgotten, and where you will be most likely to find knowledge 
of which you may be in search. In your engineering course you 
have doubtless been taught many things not because they were 
themselves practically valuable but because they showed you the 
limitations of methods used in practical design. The "rule of 



COMMENCEMENT ADDRESSES 101 

thumb" man without a theoretical education may know how to 
use certain equations or rules, but he knows neither how they 
were originated nor the limitations of their use. The fact that 
you do is bound to give you confidence in your capacity to do 
work. Learn to exercise this confidence. I once heard a gradu- 
ate of a school of engineering, who had become the president of 
one of our great railroads, tell of his first day of practical work. 
Shortly after he was graduated he was sent out at the head of a 
party of surveyors and told to do a certain piece of work. He 
found that he could not do it, but he knew that it was not beyond 
him if he were able to find time to consult his books and to reflect, 
so he said nothing but started his party on some work which was 
not relevant but which kept the men busy all day. That night he 
worked hard and the next day he was ready for all contingencies. 
His party never knew the difference. 

As you sit here to-day with one period of your life about to 
close and another with all its unknown possibilities about to begin, 
some of you are likely to look forward with uncertainty and 
perhaps with some dread into the immediate future. You may 
have heard that the professions are crowded ; that every place is 
filled, and you may fear that there is small chance for a young 
man to obtain a good position at the beginning — that there will 
be much drudgery with little hope of promotion. What chance 
have I, you may think, in entering a profession where I will have 
to compete at the outset with men of perhaps equal training and 
of long experience? What chance to succeed where such a 
crowd of able men are all struggling for the same end? What 
chance to improve devices which so many great minds have dwelt 
upon, or methods developed by many years of study? If you 
have placed your hopes too high, if you have overrated your 
present value, if you expect to rise too fast, you will be dis- 
appointed. But it is an undoubted fact that there is to-day 
plenty of work and at good pay in all the professions in this 
country for young men of ability and energy, for young men 
not afraid to work. And this is particularly so in the profession 
of engineering. Never before has there been such a demand for 
capable engineers. The country has never been as wealthy, the 



102 LECTURE NOTES 

compensation for professional services has never been as high 
and never have the prospects for the future of our profession 
been as bright. And you, the educated young graduates of 
to-day, enjoy another advantage not possessed by those who sat in 
your places ten or even five years ago. Although your number 
is increasing each year, the value of your services is becoming 
more and more appreciated. Managers who ten years ago would 
have given you scant attention, if you had applied to them for 
work, are now perforce seeking you. The number of employers 
imbued with the idea that a so-called "theoretical education" 
rather lessens than increases the value of a young man for the 
practice of the profession of engineering, and who place their 
dependence upon the "practical man" — meaning the man without 
a theoretical training in the schools — is very rapidly becoming 
smaller — I believe has almost disappeared. This source of com- 
petition has been almost eliminated and your chances of making 
a satisfactory beginning have been correspondingly increased. 
You will note that I have said a beginning. Do not, however, 
overrate the value of your education. As you go forward you 
will find that you will often have to compete with men of great 
energy and capacity who have forged ahead in spite of a lack of 
the educational advantages which you have enjoyed. 

When you have secured a position your chance of advancement 
depends upon circumstances as well as upon your own efforts. 
Vacancies are continually occurring. Promotions are constantly 
taking place. It is to be regretted that the latter do not always 
depend upon merit. You may become certain, after you have 
been employed a sufficient length of time to thoroughly under- 
stand the conditions, that adventitious reasons and not merit will 
determine advancement in that particular corporation or business. 
In that case the length of time you stay should depend upon the 
value to you of the knowledge you are acquiring. Do not, how- 
ever, make up your mind too quickly that your chances are small. 
Whilst favoritism is often shown, employers are generally forced 
to rely on men who have shown themselves hard-working, con- 
scientious and capable. 

If you are employed by a large corporation do not get the idea 



COMMENCEMENT ADDRESSES 103 

that the higher officers know nothing of you and that zeal and 
efficiency will not increase the chances of your promotion. You 
will make a great mistake if you imagine that earnest and faithful 
work will not count and will not be known. The men in com- 
mand know much more than you may think of the records and 
capacities of those upon whom they have to depend for their own 
success. The success of the manager depends largely upon the 
efficiency of those whom he employs in positions of trust, and the 
best managers well understand that one of their most important 
functions is to obtain an accurate knowledge of the capabilities of 
the men in their employ. Work hard and wait. Make the best 
of the small opportunities which come to you so that when the 
large ones come you will be well prepared to grasp them. 
Remember that opportunities seldom come to those who fail to 
seek them. As has been said, opportunities are the worst pitfalls 
for the unprepared, but are the ladders of success for the patient 
toiler and the ever ready mind. 

You may have noticed how often I have used the word work 
in speaking of your chances of usefulness and success. It hardly 
seems necessary for me to dwell upon the importance to you of 
constant and earnest labor. By no means the least valuable part 
of your education here is the capacity for work you have 
acquired. Probably many of you have learned here, for the first 
time, the importance of steady application. It is well for each 
one of you if this lesson has been thoroughly impressed. The 
biographers of great men give many reasons for their success. 
But on each list one reason invariably appears, so invariably as 
to cause the origination of that hackneyed definition of genius 
which perhaps is the one, in the main, most nearly correct. Not 
alone in the more prosaic of the occupations of men has the 
capacity to take pains counted as the greatest of the factors 
which tend to differentiate its possessor from the common throng. 
But the greatest of sculptors, painters and musicians, men above 
all others with whose names we have learned to associate the 
word genius, would never have earned their fame if they had not 
possessed this capacity developed to an abnormal degree. Each 
one of you in the future will attain his measure of success. Many 



104 LECTURE NOTES 

complex causes, some beyond your help, will affect this. But of 
one thing you may be certain ; that whatever other qualities which 
make for success you may have, if you do not work earnestly and 
faithfully, your chances will be small. And on the other hand, 
whatever qualities you may lack, if you are persistent and work 
constantly, you will be certain to be reasonably successful in that 
which you undertake. 

Although work is a potent factor affecting your careers, it does 
not follow that you must make drudges of yourselves in order to 
succeed. Men, like children, are made dull by no play. There is 
plenty of time for recreation. If you really love your profession 
you will find your best and highest recreation in your daily work. 
But in order to do this work in the best manner you must have 
interests beside it. You will make all the better engineers if you 
broaden your horizon in directions apparently alien to your work. 
In music or literature or art you may find those broadening influ- 
ences which increase your general knowledge and thus directly 
affect your capacity in your own specialty. 

I cannot omit mentioning one factor of the greatest importance 
in your professional life. From the day you begin your career to 
the day you end it your integrity should be beyond question. 
It would be futile for me to say to you that you cannot be success- 
ful unless you are honest if the term success be used with a 
meaning often given it. But even with this meaning your chances 
are very much greater if your integrity is unquestioned. Leaving 
out of consideration all the higher and better reasons and assum- 
ing that the nobler instincts are wanting, it still pays to be honest. 
Integrity is a commodity of the highest commercial value. In no 
profession is this more true than in ours. It is not enough that 
the young engineer should be honest. He must be extremely 
careful in dealing with contractors so that no unscrupulous person 
can take advantage of his inexperience to make use of him and 
injure his reputation. 

Gentlemen of the Class of 1905, you are fortunate in the choice 
of your profession. If you wish to do good in the world, if you 
wish to add your mite to the cause of human progress, if you 
wish to increase the total of human happiness, you could, I 



COMMENCEMENT ADDRESSES 105 

believe, have chosen no other profession to accompHsh your object 
so well. Think what the engineer has done for the world in the 
short span of a human life, in threescore years and ten. Beside 
those of the other professions the history of ours is short. But 
how full of incident and progress! How startling the rapidity 
with which great events and discoveries have succeeded each 
other ! How enormous the value of the work of the engineer in 
the development of the world's resources ! Stop for a moment 
and think of the condition of our country before the first loco- 
motive was built, before the first rail was laid ! What harbingers 
of progress those metal bands have been! As they have been 
pushed forward and outward, civilization has followed them. 
Populations have been enormously increased. Barren wastes 
have been converted into abodes of happiness and peace. And 
on the seas great steamships, by increasing facilities for travel 
and by the transportation of the varied products of the earth, 
have widened the horizon of nations and broken down many 
barriers to progress. But this increase in the facilities for travel 
has been only one of the many benefits resulting from the work 
of the engineer. To him are due as well great constructions 
which in many lands have added to the knowledge and health and 
happiness of many people: great dams which store water for 
irrigation and for the production of power, machines for the 
transformation of energy and the transmission of power, whose 
intricacies and whose magnitude are marvelous tributes to 
genius, sanitary constructions and systems which have enormously 
diminished the ravages of disease and have added to the length 
of human life. You, young gentlemen, are about to enter this 
noble profession. You are to take up the work now dropping 
from the hands of many who have been faithful servants to the 
race. Try to be worthy successors to them. Emulate not only 
their work but their integrity and their truth. Do your duty. 
Make the most of the talents which have been given you. Most 
earnestly I hope that each one of you may have a life full of 
usefulness and happiness. 



ADDRESS TO THE CLASS OF 1906 

By 
John Hays Hammond 

This is the era of the engineer. To her supremacy in the 
industrial art, rather than to the triumphs of diplomacy and of 
war, America owes her recognized position in the forerank of the 
nations of the world. Therefore it is not an idle boast to claim 
for the engineering profession a large, if not indeed the chief part 
in this attainment. Not only in the development of new spheres 
of activity, but among the pioneers of civilization itself, the 
engineer has been ever in the van. First, as the mining engineer 
in quest of gold, and then followed his confreres, the civil, the 
mechanical and the electrical engineers in turn. 

Conspicuous in this work are the sons of your honored Alma 
Mater. The names of Brinkerhoff, Gibbs, Glasgow, Jacobus, 
Kelley, Lieb, Wolf, your learned president and many others, come 
to one's mind in this connection. Therefore you, gentlemen of 
the graduating class, are to be specially congratulated upon the 
propitious circumstance that you enter upon a career in a pro- 
fession to-day honored throughout the world, and that you go 
forth to seize the opportunities offered you and to assume your 
responsibilities accredited graduates of the Stevens Institute of 
Technology. It is with reference to your opportunities, that is, 
the province of your profession and also of the duties imposed 
upon you individually and collectively by your Alma Mater, that 
I shall speak to you. 

Though, as I have said, the engineering profession has done 
much to promote the welfare of mankind, there has been, I think, 
a wholly inadequate appreciation of its services. 

I do not wish to lay myself open to the imputation of com- 
mercialism by intimating that success can be best reckoned in 
dollars and cents. But nevertheless, I do confess my conviction 
that money is an important consideration in the measure of 
accomplishment. I hasten to disclaim, however, any intention to 



COMMENCEMENT ADDRESSES 107 

disparage the admirable work done by engineers sometimes in a 
position where the guerdon lies not in the pecuniary recompense, 
but in the winning of fame, which is indeed more precious than 
any other testimonial of success. Notwithstanding this reserva- 
tion, I believe that we owe it to our profession to insist upon a 
fair monetary compensation for our service as engineers. 

In common with that of the wage-earner, the remuneration of 
the engineer is determined largely by the law of supply and 
demand. Until within the past few years, there has been a 
superabundance of engineers, and the shrewd business man has 
not been slow to take advantage of the situation to cut down 
salaries and fees. To prevent the recurrence of this condition 
and the consequent professional congestion — if I may use the 
term — I advocate the extension of the scope of the engineer. I 
would have him invade the sphere now monopolized by the 
employer and the capitalist and eventually become, in fact, him- 
self, the master, for I cannot see wherein a technical education 
per se should deprive a man of business aptitude. 

Contrariwise it is not unreasonable to believe that a man 
equipped with technical education supplemented by experience, 
and a knowledge of business methods, is far better able to pro- 
mote and to manage industrial enterprises than the so-called 
practical man of business. A business man who has the requisite 
technical knowledge to become his own engineer has as great an 
advantage over the non-technical business man as has one speak- 
ing a certain foreign language over his less fortunate competitor, 
who must obtain the services of an interpreter in the conduct of 
negotiations in that tongue. 

In other words, where the engineer himself has the direction 
of the financial, the commercial, and the technical departments 
of an industrial enterprise, there is a prevention of what I might 
call the lost-motion that obtains under the present system. 

Following the procedure indicated, not only would there be 
greater opportunities for the engineer, but there would also be 
introduced into the financial management of industrial enter- 
prises, a conservatism and an honesty of purpose which unfor- 
tunately does not always now obtain. 



108 LECTURE NOTES 

This suggestion may seem somewhat visionary to those who 
have followed the conventional lines of the past; but having 
observed the success that has rewarded the efforts of the mining 
engineer in this direction, I am emphatic in advocating the ex- 
tension of the principle to all branches of engineering. 

Until recently the mining engineer has also submissively borne 
the employer's yoke and accepted whatever compensation was 
vouchsafed to him by the not always liberally disposed capitalist. 
Latterly a new era has dawned. 

The mining engineer has at last struck for more equitable treat- 
ment, and as a result is now able to look forward to becoming 
eventually a partner, rather than to continuing indefinitely as an 
employee in the enterprise under his direction. 

This he expects to accomplish by serving at first his apprentice- 
ship strictly in the position of an engineer, and by subsequently 
rendering his professional services for an interest in the profits of 
the business. 

Obviously all engineers do not possess the qualifications re- 
quisite for commercial success. But they will not, I believe, be 
found more generally lacking in these essentials than is the 
average man of affairs. You quite naturally might ask how this 
plan meets the views of the employer. Does he regard it as 
antagonistic to his interests and to be resisted by him? Having 
in mind the experience of the mining engineer, I answer decidedly 
not, but on the contrary that the plan is one which strongly com- 
mends itself to the employer, for the reason that such a business 
arrangement not only assures the loyal cooperation of the engi- 
neer, but secures his undivided and constant endeavors in further- 
ance of what thus becomes the mutual interest of the employer 
and engineer. This phase of your professional opportunity is in 
my judgment of paramount importance, and I commend its 
favorable consideration to those to-day embarking on their career. 
Verhum sap. 

The question is often asked, What are the essentials of pro- 
fessional success, and should not a special aptitude in mathe- 
matics, mechanics or other branches insure a successful 
career? To this question I have always replied, that while those 



COMMENCEMENT ADDRESSES 109 

who have exceptional abiHty in the mastery of the studies of the 
curriculum are greatly favored, and while further, a technical 
education is in itself indispensable, I would nevertheless rate 
these qualifications far lower in the scale of relative importance 
than the individual character of the engineer. 

First, then, and above all other considerations, I would place 
the possession of character. An honest, clean-cut, straight- 
forward, conscientious young fellow, ambitious, persevering and 
last, but by no means least, level-headed would in my judgment, 
possess 75 per cent of the essentials of success ; while in relative 
importance I would not attach more than 25 per cent to the 
possession of a technical education. And I say this without 
in any degree depreciating the inestimable value of a technical 
education. 

Without character the monument of the engineer would be as 
unstable as an edifice where the mortar is deficient in lime. 
Therefore I urge you to persevere in the development of character 
in its widest sense, and especially ever to be jealous of your repu- 
tation for integrity. 



Where ye feel your honor grip 
Let that aye be your border. 



There are two critical epochs in a man's career. First, when he 
graduates and starts on his life's work. A start in the right direc- 
tion is all-important. The Germans have a proverb illustrative of 
this : 

Gut begonnen : 
Halb gewonnen. 

One of the greatest enemies of success, as you have been told 
times innumerable (but this fact shall not deter me from repeat- 
ing it) is conceit — that kind of conceit which manifests itself in 
what is aptly, if not elegantly, called "the big head." It is not the 
dolichocephalous nor the brachycephalous kind referred to by 
phrenologists, for in spite of the paradox, it comes rather under 
the category of the "pinhead." Whatever the shape may be, a 
small quantity and inferior quality of brain matter is character- 
istic of the disease. 



no LECTURE NOTES 

There are many ''big heads" graduated from college every year, 
but when the disease is not eradicated or checked, the victims are 
soon "sized up" by the discriminating public and forthwith rele- 
gated to the category of mediocrity and thenceforth are but 
laggards soon lost sight of in the race of life. 

The disease is sometimes also latent and does not develop in a 
dangerous, nor even to an obnoxious, degree until later in life — 
usually at the time of some transient success, commonly of the 
financial kind, whereupon it often develops with extraordinary 
rapidity. This is the second critical epoch. 

It was the inimitable Touchstone who said : "Call me not fool 
till heaven has sent me fortune." 

The "big head" that has attained this temporary or more likely 
merely fancied success has reached the highest point of his self- 
conceded glory and, like Lucifer, falls, never to rise again. For 
the rest of mankind it is a very fortunate effacement. 

This disease is fortunately rare among the graduates of scien- 
tific schools, for there the subjects taught provide in themselves 
correctives of conceit. 

You may rely upon it that the demeanor of the successful man 
is the absolute index of his mind and character. The really great 
man who achieves genuine success is of all men the most modest 
as to his accomplishment. He has, of course, which is proper 
and desirable, a self-respect, and also pride in his achievements, 
but he is not the least conscious that his success has been due to 
any greatness on his part, ascribing it rather to that kind of genius 
that is synonymous with honesty of purpose and indefatigable 
endeavor. 

The truly great man knows how insignificant are his achieve- 
ments compared with the work before him, and would say, as did 
Cecil Rhodes on his death-bed — a truly great man and one of the 
most modest whom I have known — "So little done, so much to 
do." 

After safely escaping the crises referred to, keep on raising the 
monument of your success. The higher the monument the 
broader must be the base, for you will find it indispensable as 
you are brought in contact with men of greater importance in 



COMMENCEMENT ADDRESSES 111 

your day's work to possess a wide knowledge of many subjects 
that cannot be included in the curriculum of the technical schools. 

You should, therefore, complement your technical education 
by a study of the humanities, since you shall find the possession 
of a capacious rather than a subtle mind to be of incomparable 
advantage. 

Finally, if you have "taken the current when it serves you," 
you will obtain that success which will not only prove a gratifica- 
tion to yourself, but a source of pride to your ever solicitous 
Alma Mater. But should untoward circumstances intervene to 
frustrate your endeavors, you will at least find solace in the reflec- 
tion, '* 'Tis not in mortals to command success, but we'll do more, 
Sempronius, we'll deserve it" — or perhaps expressed in the sen- 
tentious, if uncouth, language of the cowboy, "Life ain't in 
holding a good hand, but in playing a poor hand well." 

Now as to your duties : You have obligations not only to your 
profession, but to the community in which you live. Fortunately 
for yourselves and your fellow men, you do not belong to that 
pitiable and yet despicable class of idle rich that are born to lead 
a life of indolent contentment, an existence worse than negative, 
inasmuch as its example is enervating and demoralizing. 

Our condemnation of idleness must not involve our approba- 
tion of that spirit of hyperstrenuousness that has obsessed not 
only our days of toil but our hours of recreation as well. But 
that is another story. 

To you, gentlemen of the graduating class, is to-day confided 
a trust as sacred to her as life itself — the good name and prestige 
of your Alma Mater. She looks to you not only to use your best 
endeavors to bring to her renown through your professional 
accomplishments, but she relies upon you also to represent her 
faithfully in the discharge of your duties as patriotic citizens of 
our country. 

We professional men are so much occupied with our technical 
work that we are inclined to neglect the political and social aflfairs 
of the community in which we live, as well as the larger political 
and social problems of our country. Were we not actuated by 
higher motives, our own self-interests at least should impel us to 



112 LECTURE NOTES 

concern ourselves with these matters, since upon the well-being 
of the body politic, and the welfare of the country in general, 
depends the status of our own vocation. 

As engineers, individually and collectively, we should set a 
high moral standard, not only in our professional ethics, but in 
our civic relations as well. Moreover, we should not be satisfied 
with the mere example of negative honesty in our lives, but we 
should be aggressive against all forms of corruption, especially, 
of course, in our own professional field, where our confreres 
should be held strictly to account for all transactions that tend 
to discredit our profession. For we must constantly keep in mind 
the fact that it is our profession, and that the encomiums we 
receive because of our labors are valuable only so long as the 
profession itself is exalted in the esteem of our fellow men. 
Therefore keep its reputation unsullied while doing your utmost 
to magnify its importance. 

Although there are, of course, some black sheep even within 
our engineering fold, there is, nevertheless, among scientific men 
generally, an unquestionable predilection for rectitude to an extent 
that is indeed sui generis. This is due to the many years spent by 
them in scientific research, which inculcates a veritable zeal for 
truth, even to the degree of what Huxley calls, a "fanaticism for 
veracity." 

While we must be exacting, as I have said, in our demand for 
high-grade professional morality, we must not forget that it is 
also our duty to encourage and to sustain those who are striving 
to win new laurels for our profession. 

The unintelligent, unjust and sometimes indeed dishonest crit- 
icism of the work being done on the Panama Canal comes to my 
mind in this connection. 

We engineers can sympathize with our confreres who, despite 
the importunate demands for greater haste, insist upon a thorough 
study of the problems presented before beginning operations 
which otherwise might jeopard the ultimate success of this the 
greatest engineering work yet attempted by man. 

There is a deplorable prevalence in these times of a class in the 
community to whom President Roosevelt referred as ''muck 



COMMENCEMENT ADDRESSES 113 

rakers." These men constantly scoff at public virtue and feel an 
ill-concealed gratification in the discovery of scandals affecting 
men of prominence, especially in governmental positions. 

These degenerates should be treated as social abominations, for 
they are closely allied to the dangerous class of anarchists and 
nihilists, who are allowed to breed and to hatch nefarious plots 
with perfect impunity within the borders of our unwisely tolerant 
country. 

My young confreres, let us rather incline to idealism and to 
become hero-worshipers than to yield to the tendency to be hyper- 
critical, or to run the risk of being tainted with ''muckrakism." 
It is so much easier to criticise and to point out the defects than 
it is to conceive and to elaborate undertakings of importance. 
As Bacon says : 

"There are no reports more readily believed than those that disparage 
genius and soothe the envy of conscious mediocrity." 

Reform is now the popular theme of our statesmen, and the 
ban of public opinion is fortunately emphatically against dis- 
honest methods in business as well as in public life. 

We should, of course, give our hearty support to these meas- 
ures of reform, but let us do it deliberately, moderately and per- 
sistently, rather than by hysterical, paroxysmal and short-lived 
efforts. 

With this final admonition, I leave you : 

This above all : To thine own self be, true, 
And it must follow, as the night the day, 
Thou canst not then be false to any man. 



ADDRESS TO THE CLASS OF 1907 

By 
Paul Morton 

I consider it a great privilege to be permitted to address the 
graduating class of Stevens Institute of Technology to-day, and 
at the outset wish to pay a tribute to the family of celebrated 
engineers who did so much for the world in establishing this 
school, the graduates of which are now doing and will hereafter 
do so much for the good of mankind. 

It was my good fortune to have been brought up as a boy on 
the frontier in Nebraska on the west bank of the Missouri River. 
My earliest recollection of transportation is of Missouri River 
steamboats and large trains of covered wagons, commonly called 
"prairie schooners," passing my father's farm drawn by six- 
mule or twelve-ox teams and headed for Denver, Salt Lake City 
or "Pike's Peak or Bust." We were then three hundred miles 
from the nearest railroad. 

With my own eyes I have seen the Indian, the buffalo, the ox 
team, the mule team, the six-horse stage and the side-wheel 
steamboat disappear, and substituted in their place I have seen 
civilization with its railroads, its schools and churches and in- 
dustries, until to-day there are over 10,000 miles of railroad 
within a radius of 100 miles from that same spot, and nowhere 
on earth will one find a more prosperous or more contented com- 
munity. The last half century has shown more radical improve- 
ment in transportation than all the centuries preceding it. 
Seventy years ago a day's journey was less than fifty miles, now 
that distance is covered in an hour. 

Under these circumstances, it is not at all surprising that I 
consider it not only a great privilege, but a high honor to appear 
to-day before the graduating class of the institute founded by 
the pioneers in solving the problem of steam transportation, one 
of whom invented the "Tee Rail," as well as the tie and spike 
construction so generally used throughout the world. What a 
great benefit it has been to humanity ! 



COMMENCEMENT ADDRESSES 115 

Those frontier freighters who crossed the plains were a brave 
and a rugged set of men and had many difficulties to contend 
with. There was either too much dust or too much mud, too little 
wood or too little water, too many Indians or too many buffaloes, 
or something wrong all the time, although they did have the com- 
pensating offset of not having any drastic state regulation, two- 
cent fare laws, yellow journalism, or any unfair walking delegates 
of labor to cope with. 

We are, however, always confronted with conditions of some 
kind to overcome, and it is a wise man who adjusts himself to 
them and undertakes to surmount all obstacles. Complex condi- 
tions produce emergencies, and emergencies are met by men of 
skill and courage. 

The young man who starts out to win his way in the world 
with a technical education has about the same advantage over a 
competitor without an education that a locomotive possesses over 
an ox team. Everything is in its favor to start with, but none of 
you must ever forget that a locomotive can be wrecked in many 
ways, and with bad handling may not get to its destination with 
as much satisfaction as the ox team. Much depends upon the 
road, but more upon the driver. Every man is his own engineer 
when it comes to selecting the road he will travel through life. 
If he gets off the track, generally he will be responsible for it and 
if he is on time he will get the credit. 

A young man just leaving college has much to learn. One of 
the very first things he discovers is that the race for success of 
every kind is a free-for-all and that in the scramble for place 
nobody gets much preference. The one person who is to help you 
most in the great contest is yourself. Self-reliance must be 
practiced always. 

There is no well-defined recipe for success. The chief ingre- 
dients of success are hard work and common sense; intelligent 
industry, in my opinion, is the basis of most of the great successes 
of the world. Enlightened and willing application to whatever 
you undertake wins — I mean by this in order to succeed you 
must have an enthusiastic interest in what you are doing, being 
fond of your calling whatever it may be and working at it hard. 



116 LECTURE NOTES 

Few men win in occupations uncongenial to them. My advice 
is to take up some kind of employment in which you can be- 
come absorbed. Get an occupation, if possible, that will enter- 
tain you. If you are a mining engineer, make up your mind to 
be a famous one. Do not be satisfied to be an average one. 
There is much less competition and much more compensation at 
the top of any profession than there is at the bottom or half way 
up the line. 

Men in the mining or mechanical profession who can make 
themselves famous by real merit, who possess good judgment, 
and are willing to work, never are at a loss for clients. 

I consider there is a wonderful opportunity for mechanical 
minds in the railroad business, and I do not hesitate to say that 
there is a great demand to-day for first-class master mechanics all 
over the United States. It is my opinion that one of the weakest 
spots in our transportation business in this country to-day is 
mediocrity in the management of the machinery departments of 
railroads. There are too many engine failures owing to the 
failure to have the right men in charge of machine shops. Pro- 
motions to higher positions in the railroad world are just as likely 
through the mechanical department as any other. There is no 
royal road to promotion. Railroad managers are made from all 
branches of the service, and to have a technical education is a fine 
basis to work from. 

A young man who wants to make headway in the world must 
have more than a technical education. He must do the small 
things well. He must not be afraid to work overtime. He must 
be civil; he must give and take in deaHng with his fellow men. 
Be tolerant of others. The greatest study in life is men. Make 
it a rule to get along with people. If you know more than they 
do, let them discover it, you do not have to tell them. It is poor 
policy for you to assert or even admit your knowledge is the 
superior. Generally you can supplement your technical education 
greatly by coming in contact with thoroughly practical men. You 
must be loyal. Fidelity is one of the noblest traits of man and 
whatever interest you serve, make it a rule to be faithful to it. 
When you cannot be loyal to your employer, better find another. 



COMMENCEMENT ADDRESSES 117 

Do not be too independent — I have known some of the very best 
of men to spoil their careers by the exhibition of a fooHsh inde- 
pendence. I do not for a minute recommend any man to put up 
with indignities or to suffer from tyranny, but I do urge every 
man to learn to control himself, and if for a while your indepen- 
dence seems menaced, bear in mind that many a good man has 
swallowed his pride and in time greatly profited by his self- 
control. Self-control is necessary to success. It is not an unusual 
occurrence for a young man with a technical education to find 
himself subordinate to a practical, hard-headed, self-made man 
who from mere envy may at times be unfair. In a case of that 
kind keep a cool head, and if you deserve it, time will bring things 
around to about where they ought to be. Self-interest prompts 
every employer to keep the best men, the ones who can achieve 
the best results. You must be more than technical. You must 
be analytical and commercial. You must be posted on shop costs. 
You may build ever so good a machine, but if its cost is too great, 
it is of no commercial value. 

Material success in this world is largely measured by manage- 
ment. President Roosevelt in talking to me one day on this very 
subject, gave the best illustration of what management means 
to an institution, that I have ever heard. 

He said as a boy he used to pass regularly by the great store 
of A. T. Stewart, who at that time was the most successful mer- 
chant in the world. Stewart was a manager. He catered to his 
customers. He studied their wants and personally saw they 
were well taken care of. He selected his employees with great 
judgment. He died, left a great fortune, and was succeeded by 
Hilton, Hughes & Co. The location was the same, the goods 
handled were similar, the crowds passing along the streets were 
the same, each year larger in size, but the trade commenced to 
dwindle. The goods were not shown in an attractive way. The 
business did not have the right attention and the employees lost 
their interest. The business was not a success — the firm failed. 
They were not managers. John Wanamaker comes along — takes 
the same store — handles about the same line of goods — same 
crowd is passing along the streets — great attention is given to 



118 



LECTURE NOTES 



patrons — John Wanamaker attends to the business personally. 
He has a genius for merchandising, knows how to advertise, is a 
born trader. The result is a great success. What better com- 
mentary on management can there be? What more can be said 
in favor of compensating a good executive Hberally for achieving 
results, or to show that bad management at any price is extrava- 
gance ? 

Whatever you do, do it with all your might. The battle of 
life, the material side of it, is a game, and the better you play it 
the better you will like it. Play it to win. 

It is a game of the survival of the fittest. If you fail to win, it 
will be your fault. If you play it fair, if you are a man of in- 
tegrity, if you are a decent citizen, if you do your best, I am sure 
great fame and fortune will wait on many of you. 

You should take an animated interest in public affairs ; you owe 
your country that. It is not only essential that every good citizen 
be alive to what is going on in state affairs from the standpoint 
of government, but it is a duty and you will also find it a diver- 
sion. 

Be natural — do not pretend to be something that you are not. 
It is much more gratifying to be taken at your real value than to 
have people discover you are not what you pretend to be. 

Some one has jocularly said the difference between reputation 
and character is, that the first is a necessity and the second is a 
luxury. Reputation is the estimate others put upon you and 
character is what you really are. Too much attention cannot 
be used in the formation of character. The character of the 
British is what has made England great. 

A technical education teaches you how to do things, but 
nothing but your own force of will-power will make you do things. 
Others can tell you how and what to do, but self alone will do 
them. Many a good man has failed to accomplish much in this 
world because he was lazy. Timidity is another weakness to be 
avoided. A man should neither be too bashful nor too forward. 
Many a man of ability has been afraid to approach others higher 
up in the world and by so doing continued in a rut, when he would 
have been a great success if his capacity had been given an oppor- 



COMMENCEMENT ADDRESSES 119 

tunity. There is not much difference between men, and the 
nearer you get to captains of industry, eminent financiers and 
multi-millionaires and others higher up in the business world, 
the more you will see their close resemblance to other human 
beings ; and the more you will discover, as a rule, that they started 
out in life with nothing half so promising as a technical educa- 
tion; all many of them had was a desire to work, determination 
to win and good judgment; the nearer you get to this class the 
greater your appreciation of the fact also that they are looking 
for skill, good sense and honest men for important places which 
they have to offer to the right men. There are any number of 
twenty-five to fifty thousand dollar positions looking for men 
who can competently fill them. In addition to becoming very 
useful citizens generally, I hope it will not be long before each 
of you is filling one of these places to your own and everybody's 
satisfaction. 

None of you will be contented, however, merely to do well in a 
material way. You should have a higher ambition than mere 
wealth. You should aspire to do something that will be of 
advantage to all mankind. 

I know of no point to start from on life's journey that is in 
any way superior to, or more promising than, the beginning you 
are making to-day from the graduating class of Stevens Institute ; 
and I congratulate both the class and the institute on the great 
things you are bound to accomplish on the trip you are about to 
make. 



% 



ADDRESS TO THE CLASS OF 1908 

By 
Henry S. Pritchett 

These commencement days are good occasions for all of us, and 
it is worth while reminding ourselves now and again, with the 
passage of these soldiers of industry into the active life of the 
world, of just what the commencement day means; how it is that 
it has come to be a celebration distinct in its own significance; 
what the customs were of the old academic life which brought it 
about and what these traditions mean to us — for the traditions 
of this day hark back to some of the oldest of the European uni- 
versities. The very academic garb which we wear is an inherit- 
ance from the great English colleges, and the term "commence- 
ment" itself has come down to us from the old-time usage of 
Cambridge, some five hundred or six hundred years ago. The 
term "commencement" has almost been forgotten in its original 
sense ; and now and again one sees the inquiry, which I remember 
to have heard voiced many years ago in a college far distant from 
this, where the June roses, nevertheless, bloom just as sweetly 
and where the graduation exercises meant, perhaps, just as much. 
I remember hearing the old colored janitor of the college say: 
"What does this hyer 'commencement' mean ? It seems to me we 
talks about commencement just at the time when we close up the 
buildings and everybody goes away. It seems to me," said he, 
"that that ought to be the ending, not the commencement." 

It is worth remembering that the term "commencement" came, 
in the old academic life of Cambridge, from the custom that then 
the teacher received his title "master" — magister in the Latin — 
the origin of our own English word "mister," a word which it is 
all the greater honor to be permitted to have as a title in these 
days when the title of "colonel" can be won so easily. In that 
old-time college life at Cambridge, five or six hundred years ago, 
commencement day meant that the "master" that day came into 
the exercise of his power; that the "master" that day came into 
the practice of his profession ; that that day commenced the actual 



COMMENCEMENT ADDRESSES 121 

exercise of the influence and the power of the man who had been 
educated ; and so to you men who go out as engineers, commence- 
ment means to you, of all others, the beginning of the practice 
of a profession ; and as I have thought to-day over what might be 
said to you, briefly, by a fellow member of your class, one of the 
surviving flowers who has yet lived after the "weeding-out" pro- 
cess has borne its perfect fruit, it has seemed to me that, perhaps, 
I could do you no better service than to quote to you the words 
of two men, one a great American engineer, the other a great 
English philosopher. I heard once an engineer who had spent a 
long and an able life in the practice of his profession, addressed 
somewhat cavalierly by a representative of a business firm, who 
said to him: "You are in the business of engineering, I believe?" 
"Excuse me," said the engineer, "I am in the profession of the 
engineer." And the other word which I should like to commend 
to you is the word of Francis Bacon in the introduction of that 
remarkable volume, "The Maxims of the Law," in which he says : 
"I hold that every man is a debtor to his profession." 

In other words, I venture to ask you to carry forward into your 
practice from to-day's occasion these two simple reflections: 
First, that, as graduates of an institution of learning, as trained 
engineers, you are going into the profession of engineering, not 
into the business of engineering; and secondly, that, as members 
of one of the great professions, each one of you is a debtor to 
that profession. 

What is the difference between a business and a profession? 
Both a business and a profession are alike honorable callings, 
but the world has agreed that there shall be attached to some 
great vocations the title "profession," because it assumes that 
these callings carry with them unusual obligations ; callings which 
involve not only energy and ability and right thinking, the power 
to organize, the power to get out results, but also carry with 
them the obligation of honor to the calling itself and the obliga- 
tion of service to humanity and to the things which humanity 
needs ; and the difference between a business and a profession, as 
the world looks at them to-day, is that, in the calling of a business 
the man undertakes honestly, heartily, sincerely to advance his 



122 LECTURE NOTES 

own interest without assuming any formal obligation to the social 
order, while in a profession a man also undertakes heartily, ener- 
getically, sincerely to advance his own interest, but with the dis- 
tinct obligation to serve also the larger cause of humanity and of 
civilization; and with the distinct obligation that, whenever the 
lines of this higher duty interfere, personal interest and personal 
advantage must give way — and this is to-day the difference, as 
the world defines it, between a profession and a business. 

The rise of these great professions which the world recognizes 
is the story of the rise of civilization itself. If one goes back far 
enough he finds that there were no professions, no particular call- 
ings differentiated from the general business of society and the 
general business of the world. Gradually there have emerged 
the profession of the minister, the man who gives his life to im- 
pressing upon his fellow men a higher moral obligation ; the pro- 
fession of the law, followed by the man who devotes himself to 
that calling which shall bring man into justice, into truth, into 
the right exercise of his civil rights ; the profession of the physi- 
cian, who ministers to human suffering and promotes human 
health; and within these last fifty years there has been admitted 
also among these great professions, the engineer, the man of 
science, the man who, taking the forces of nature, has welded 
them into a useful machine for the advancement of civilization 
and for the conservation of that which civilization serves ; and so 
to-day these men who go out as engineers are members of a small 
group of the great professions, of which the world demands not 
only an efficient service, but also obligations which are greater 
than those of a business or of an occupation which aims primarily 
at the advancement of the individual. 

Sometimes these callings have not remembered this obligation; 
sometimes these great vocations which we call professions have 
fallen below the demands which society makes upon a profession; 
sometimes these professions have sunk into a business rather than 
into a profession. Within a short time a distinguished representa- 
tive of the law has called attention to the modern lack of respect 
for law in our country, to the fact that law is not observed by 
Americans with anything like the faithfulness or the accuracy or 



COMMENCEMENT ADDRESSES 123 

the respect which is given to the observance of law in some other 
civiHzed countries. He pointed out some of the difficulties which 
lawyers find in promoting that observance, and I venture to sug- 
gest one great difficulty which was not touched upon, and that is 
the difficulty in the profession of the law itself, for many of those 
who stand to-day for the law are in the business of the law, not in 
the profession of the law. They are men who are giving their 
energies, their intellect, their intelligence, to the service of men 
whose purpose is not to obey the law, but to evade the law ; and 
the man, whether he be preacher or lawyer or doctor or engineer, 
who serves any other man or any corporation from the stand- 
point of a business which may absolutely command his services, 
rather than from the standpoint of a profession to which he gives 
his service loyally, energetically, heartily but always with reference 
to the larger obligation and the larger duty — that man who gives 
his services unreservedly, without thinking of the larger duty 
and the larger obligations, has got into the business of preaching, 
into the business of the law, into the business of medicine, into 
the business of engineering, not into its profession. This, gentle- 
men, is really the distinguishing difference between our engineer- 
ing profession of to-day and the engineering vocation of a thou- 
sand years ago. 

I think we sometimes assume that the engineer has come into 
one of the learned professions, that the man of science has been 
admitted into the company of the great professions, because of 
the magnitude of his present-day work. I apprehend that that is 
a mistake. The engineer has, in all the centuries of civilization, 
been he who applied the science of his time to the practical prob- 
lems of humanity; and the engineers who raised the Pyramids, 
who built the temples of Karnak, who built the Babylonian gar- 
dens carried out works as great in their day as anything which 
we have done. The essential difference between the engineer of 
to-day and the engineer of a thousand years ago, is that the engi- 
neer of to-day is in a profession, and he is in a profession because 
he has assumed the obligations which every profession must as- 
sume to society before it is elevated into the dignity of a profes- 
sion in the eyes of the world. 



124 LECTURE NOTES 

And what is the debt which a man owes to his profession? 
How can that debt be paid ? Does it mean — and these ideas mean 
nothing unless they can be put into practice — does it mean that 
when the engineer is employed by some contractor or by some 
engineering firm or by some capitalist, that he is to stop and con- 
sider whether he shall serve his employer or whether he shall 
serve the pubHc interest? Does it mean that if the engineer has 
conscientious scruples about the development of water powers or 
the enlargement of a gas plant or the extension of an electric 
railroad, that he has to go to the firm and state to them that, this 
being against the public interest, he does not find himself able to 
carry it out? Does it mean that the obligation of a profession 
involves that a man should always be testing and examining and 
questioning every act of the man who employs him or the firm 
for which he works ? It doesn't mean that, but it does mean this, 
in my judgment : that when a man works for a corporation — and 
most of you will work for corporations if you make a living at 
all — when a man works for a corporation, it means that he must 
not surrender his own ideal and his own sense of responsibility to 
the public good and to the public service, and that it is a part of 
his duty to raise the question of the right of the public as well 
as a part of his duty to serve intelligently and honestly the cor- 
poration which employs him. No man gives up his individual 
responsibility as a member of the body politic, least of all does he 
who belongs to a great profession, when he goes into the employ 
of an}^ corporation or into the employ of any individual. And 
the chief difference between the engineer of a thousand years 
ago, who was a workman, and the engineer of to-day, who is in a 
profession, is that the engineer of a thousand years ago, the work- 
man, was bought and sold and hired to do this or that as he might 
be ordered ; the engineer of to-day is the man who has to do the 
thinking and to carry out the work, all in full respect to the obli- 
gations of loyalty to his employer, but also never forgetting that 
he owes two debts to his profession, one the debt of honor and 
the other the debt of service. He who goes into the employ of a 
great corporation can never forget that howsoever great may be 
his obligations as an engineer, he has always obligations above 



COMMENCEMENT ADDRESSES 125 

those, which insist that he shall never cross the line which com- 
promises the honor of his profession or lose sight of its duty to 
the great interests of the state and the nation. And these two 
obligations, of loyalty to the employer, faithfulness to him who 
pays your salary, intelligent service to him whom you serve, in 
nearly all cases run side by side with the larger duty and the 
larger service ; and when those exceptional cases come, when they 
do not run parallel, then the engineer must remember that he 
belongs to a profession, not to a business. 

And so, gentlemen, I venture, in this somewhat desultory and 
fragmentary way, to point to you the sayings of two great men, 
one a member of our own profession, the other a member of that 
other great profession of the law, so often associated with our 
own, each speaking a truth which each of us may well remember, 
a truth which indicates, first, the honoj of belonging to a profes- 
sion ; secondly the responsibility which that honor brings. And I 
venture to add, as a last word, that he who looks forward into the 
future of his own career and who has high ambitions as an engi- 
neer, he who expects some day to gather into his hands the strings 
of influence and of power that may bring returns of salary, of 
honor, and of credit, he is the man who ought last to forget the 
obligations of a profession ; for, however well we may learn to de- 
velop things which deal with the physical properties of the mate- 
rials upon which we operate, however successful we may be as 
chemists or as physicists or as engineers, it is still, nevertheless, 
true that these world-old principles of honor and truth and jus- 
tice bear a fruitage not only in satisfaction, not only in the be- 
longing to a profession which observes such ideals, but they 
bring also, in the end, the only right reward to which any engi- 
neer or to which any professional man may come. He who does 
honor to his profession, who does not forget his debt to it, will 
have the larger success in the development of the matters which 
are temporary and utilitarian, when he remembers also the things 
which are spiritual and which are eternal. 



ADDRESS TO THE CLASS OF 1909 

By 

Julian Kennedy 

I esteem it an honor and privilege to be with you, gentlemen 
of the graduating class, on this commencement day to congratu- 
late you on the splendid work you have done during your aca- 
demic course and to say a word of encouragement to you on your 
entrance upon the broader and possibly more strenuous work of 
life. What that work will be it is hard to predict. Most of you 
look forward to being engineers and to doing your share in the 
work of utilizing nature's* forces for man's benefit. Ten years 
from now, however, will find many of you in other lines of work, 
but the chances are that more of your number will be engaged in 
engineering than in any other profession or occupation. Whether 
your future work is in engineering or other lines of work, you 
will find that the training you have received from your Alma 
Mater will be invaluable to you. Perhaps some of you may be- 
come lawyers, in which event you will find that the training in 
mathematics and clear and intelligent reasoning given in your 
course here will be as valuable to you and fit you for your work 
probably as well as any preliminary training that you could re- 
ceive anywhere. Any one reading the wonderfully clear argu- 
ments of Senator Elihu Root or the magnificent analyses of con- 
ditions made by Governor Hughes of New York could almost 
tell without other information that each of them had been a pro- 
fessor of engineering and mathematics in his younger days; and 
for a profession which involves close reasoning and clear think- 
ing, it is doubtful whether a much better preliminary preparation 
could be obtained than you have received in your course at 
Stevens. 

Assuming that the majority of you will follow engineering pur- 
suits, it may not be amiss to mention some things which you will 
have to deal with in your future work. It is entirely unnecessary 



COMMENCEMENT ADDRESSES 127 

for me to remind you that most of you are not at the present time 
engineers. Those of you who have properly utilized your oppor- 
tunities have received a splendid mental training, together with 
some knowledge of engineering, which equips you to go on and 
acquire the vast amount of practical knowledge necessary to the 
engineer. You will soon find that many kinds of knowledge 
which you have perhaps considered useless, are important and 
essential in your professional work. It is a mistake made by 
most students, and I have no doubt many of you have made it, 
to think that the faculty of the school have introduced too many 
general studies into the course instead of giving all, or nearly all, 
of fhe time to purely technical studies and practical work closely 
related to engineering. To those of you who have had this feel- 
ing, I would only say that your views will change as you go on 
and in ten years from now you will think more of the judgment 
of the faculty in these matters than you do at present. There 
is no doubt that your instructors could map out a course which 
would turn out graduates who would be able to start in practical 
work with much more ease and readiness than you can; in fact 
any boy who had spent the four years you have spent here, in the 
field or the drawing room learning practical engineering, would, 
other things being equal, be able to do routine work in an engi- 
neering of^ce much better than you could do it, but, on the other 
hand, in a very few years you should be far ahead of him. In 
other words, your instructors have been wise to give you a broad 
and liberal training, and to forego teaching you some of those 
things which would come nearest to making engineers of you at 
the time you finish your course in order to give you more of the 
broad and fundamental principles, the mastery of which will en- 
able you in a reasonable time to become much abler and more 
valuable engineers than if your training here had aimed to teach 
you the maximum amount of that kind of technical information 
which is supposed to be most immediately useful to the young 
graduate. It is much better for you to have a broad, liberal edu- 
cation and a little engineering knowledge when you leave here 
than to have a much greater amount of practical and technical 
knowledge without a liberal education. In your future work 



128 LECTURE NOTES 

you will learn that it is much easier to find among technical grad- 
uates good designers of machinery or fine mathematicians than 
it is to find those who can write a satisfactory contract or even 
a good business letter. 

At some stage of your career, some of you at least will be called 
upon to purchase large amounts of machinery and materials, 
when you will find that the ability to write a contract from which 
not one word can be omitted and of which not one sentence can 
be construed in more than one way, will be of more value to you 
than even the knowledge of the method of least squares, which 
some of you may perchance have forgotten by that time. Not 
only will your opinion of the judgment of the faculty change, but 
your general impressions of them will also be radically revised. 
In my student days there was a song, the refrain of which was, 
"There'll be no faculty there"; but after graduating you will 
begin to appreciate the faculty and year by year this apprecia- 
tion will grow stronger until you will finally arrive at a somewhat 
adequate idea of what you owe to them, and to realize that not 
to its buildings, not to its endowment, not to its alumni does your 
Institute owe its greatness, but more than all to these combined 
to that noble, earnest, unselfish, self-sacrificing band of men, its 
faculty, and as the years roll round you will appreciate how many 
of them have given up the chance to much greater material re- 
ward in other lines of work in order to do the more important 
work of fitting you to be an honor to your school and a benefit 
to the world, and at the end of a quarter of a century those of 
you who are living will be amazed at the interest taken in you 
one and all by the faculty who, like a mother, never forget their 
boys and grieve over their misfortunes and glory in their success. 

Speaking of mothers brings to mind mothers-in-law. Like col- 
lege faculties, they are often the subject of jokes, but if you will 
observe carefully and accept the verdict of those who have had 
experience, you will learn that one of the truest and best friends 
a man has in this world is apt to be his mother-in-law. In this 
connection, I may say that one of the things most essential to his 
success, which a young engineer should do not too late in his 
career, is to acquire a mother-in-law. 



COMMENCEMENT ADDRESSES 129 

I have spoken of the engineers purchasing materials and 
making contracts, which leads to the thought that a large part of 
engineering is commercial, and that commercial considerations 
must be given weight in all engineering work. We are some- 
times inclined to forego these and strive to produce something 
ideal, without reference to the question of whether it will be 
profitable or not. The man who puts in an elaborately designed 
machine to displace two laborers in a plant and finds that instead 
of them he has one skilled man operating the machine and two 
high-priced machinists keeping it in repair, may be a genius and 
a skillful mechanician, but he is not accomplishing what is 
generally wanted. You will be surprised when you get into 
actual work to find how often commercial conditions are ignored 
by engineers, and not by engineers only. It may be your experi- 
ence at some time to work hard for weeks at the urgent demand 
of a board of directors to try to reduce the cost of labor in a 
plant by five or ten cents per ton of product and you may spend 
many thousand dollars to accomplish this, while at the same time 
the output of the works is being sold year in and year out at a 
dollar or two a ton below the price it ought to bring. You will 
find also in many cases that costly machines are installed to effect 
savings which are offset many times over by the interest on the 
cost of the machinery and its maintenance. You will also find 
installed elaborate and intricate machinery to effect the highest 
ultimate saving, which because of the complication becomes un- 
reliable and subject to breakage, and you will be surprised to 
find in how many cases an hour's stoppage of a machine which 
forms part of a large and highly organized plant will cause a loss 
of more money than would be saved in a year by this highly 
efficient machine as compared with a less efficient but thoroughly 
reliable one. The larger and more complicated a plant is and 
more highly organized the sequence of operations carried on in 
it, the more important it is that all machinery in it should first 
of all be as reliable as it can be made. It should, therefore, be 
your aim to acquire as rapidly as possible, in addition to your 
mechanical ability, good commercial judgment and a wide experi- 
ence, enabling you to judge which of several different paths is 



130 LECTURE NOTES 

apt to lead to commercial success. In purchasing materials the 
engineer often has to act as the agent of his clients as well as a 
referee between them and the seller. It is, of course, his duty to 
get materials as cheaply as possible, but he should never forget 
that he ought to be absolutely fair to both parties, and the engi- 
neer who maintains this attitude will in the long run best serve 
the interests of his clients as well as his own. In doing business 
he should remember that nine tenths of the litigation in this world 
is caused by vague or incomplete understandings between buyer 
and seller, and he should exercise great care to see that every- 
thing connected with the specifications and contract is so fully 
and clearly expressed that there can be no misunderstanding 
regarding them, and he will find that to do this is by no means an 
easy or simple undertaking. 

In starting out as engineers, you should all bear in mind that 
you are largely dependent on others. The field of engineering 
is so vast that no one can cover a very large part of it, and no one 
can accomplish much unless he has the faculty of availing him- 
self of the work and knowledge of others. The man who makes 
one of the greatest failures in the mechanical world is he who 
spends his life inventing complicated machines, only to find that 
others had invented them years before. In many lines of work 
it is just as important to know what has already been done as it 
is to possess great ability to originate new designs, and as be- 
tween the man who is an expert special designer in any depart- 
ment of engineering and the one who has the faculty of utilizing 
the work of many other men in many departments, the latter will 
be the more valuable man, will be more sought after and will rise 
higher in his profession. In other words, it is not so much what 
a man can do himself as what he can get others to do that makes 
him valuable in carrying on large undertakings. 

In your work as engineers you will be called upon to make 
reports on properties, processes, etc. You will, of course, in such 
cases be sure that you understand the subject, after which it will 
be wise for you to write your report so as to say in it all you 
desire to say and write it on the theory that anyone may read it. 
You may be asked sometimes to vary the wording of your report 



COMMENCEMENT ADDRESSES 131 

on the ground that it is not to be published, but only shown to A 
or B. In such cases you will be wise to make no changes which 
you would not want read and criticised by anyone, and to bear in 
mind also that the funds of widows and orphans may be invested 
in enterprises on the strength of your report. Your written 
report should, of course, be complete in itself and should not 
need to be supplemented by oral explanations, and it should be 
so concise and clear that there is no possibility of anyone warping 
or distorting the meaning of it. While most business men want 
straight, honest reports, there is quite a respectable (as to 
numbers) minority who will try to have you warp the truth just 
a little, and who are very plausible and specious in the way they 
go about it. In work of this kind you will find that commercial 
knowledge and good judgment play a very large part, and you 
will possibly learn that expert accountants, like many other kinds 
of expert specialists, are very narrow in their views and more or 
less feeble in grasping broad principles. To be successful in this 
line of work it is necessary that you should acquire a great deal 
of general information in connection with accounts, construction 
of plants and their operation. You will also find many things in 
works which cannot be seen, and for your information in regard 
to them you will be dependent upon other people, and your 
success in getting accurate information will depend largely upon 
your judgment of men, your tact and ability to elicit correct 
information from them. Owing to the large number of things 
which have to be examined sometimes in a very short space of 
time, it will be necessary for you to acquire a faculty of seeing 
things quickly and accurately, as well as of judging of their con- 
ditions and their method of operation. This is a faculty which 
varies greatly in different men, but one which can be cultivated 
to a marvelous extent. 

You have doubtless seen men who could walk through a 
factory and come out with a wonderful amount of information 
regarding the workings of a large number of intricate machines, 
whereas another man may have passed through at the same time 
and not seen a hundredth part as much of the actual inwardness 
of the mechanism. In making reports in regard to works or 



132 LECTURE NOTES 

plants, you should be as concise and clear in your descriptions as 
possible, bearing in mind that bankers and financial men 
generally are apt to place upon a report a value in inverse propor- 
tion to its length. I remember seeing a report on a large plant 
containing some miles of railroad trestle, which gave in exact 
detail the size of every sill, every post, cap, corbel and stringer 
in the entire works, the list occupying a good many pages of legal 
cap ; and the entire trestle was rotten to an extent that it was not 
even fit for firewood and the only thing that was really necessary 
to know about it was the expense of pulling it down and hauling 
it away. The man who made this report was probably a very 
painstaking engineer, but lacked something in his make-up. 

You will in your future work, doubtless, be called on to testify 
as experts in the courts in cases involving mechanical considera- 
tions and patents. There has been a good deal of criticism of 
the system of having experts on each side of a case, and many 
have recommended that the court should engage its own expert, 
but all things considered, I have no doubt that a fuller and fairer 
knowledge is gained by the court if it listens to two experts each 
putting forward the strong arguments for his own side of the 
case, than if only one expert is heard, as he is liable not to see all 
sides of the question, and may, with the best intentions in the 
world, give a very incomplete and erroneous opinion on the 
technical points of the case. This is less likely to happen where 
each expert sets forth his own side of the matter, and is cross- 
examined by the other side. Should you have occasion to act as 
an expert in this line you should first of all be sure that you have 
a thorough knowledge of the subject; in other words, that you 
are a real expert in it. Next you should endeavor to be entirely 
fair in your testimony. It is not expected that you should volun- 
teer aid or assistance to the other side, but you should answer all 
questions fully and fairly and, above all, you should be absolutely 
honest in regard to your opinions. As a general rule, it is wise 
not to enter a case unless a preliminary study of it convinces you 
that you can be of service to your client, and at the same time 
adhere strictly to your honest opinions throughout. You will find 
it essential in this kind of work to be patient, to have absolute 



COMMENCEMENT ADDRESSES 133 

control of your temper, and to meet the most insulting and 
irritating cross-examination with unruffled composure and with 
retorts courteous. Where the facts are against your side, you 
should not try to dodge the issue but remember that frank ad- 
missions of those things which plainly favor the opposition in 
most cases help your side more than they hurt it. Remember 
always that although it may be impossible to prove that a state- 
ment of an opinion is not truthful, yet an experienced judge in 
reading the testimony will almost infallibly detect any tendency 
to untruthfulness or unfairness in a witness. 

In your engineering work you will possibly have to direct large 
bodies of men, and here you will need judgment, tact and knowl- 
edge of human nature, together with firmness and decision and a 
spirit of fairness. In addition to handling men successfully, you 
should make it a rule to learn from them and you will be sur- 
prised at the great amount of information you can gather in this 
way, especially among mechanics. Twenty or thirty years ago 
there was among the so-called practical mechanical men of this 
country, a good deal of contempt for the technical graduate. 
This feeling has to a large extent ceased to exist, but on the other 
hand I fear there is a tendency on the part of the technically 
trained man at the present time to greatly underestimate the 
value of the knowledge of the first-class mechanic acquired by 
long practical experience. Many engineers would rise much 
higher in their profession if they had the faculty of absorbing 
useful information from the working mechanics, many of whom 
have wonderful ability, and can give most valuable information. 
In a still wider sense engineers can get a great deal of informa- 
tion from their brother engineers, and team work is just as essen- 
tial in carrying on engineering work as it is in winning a game of 
football. As you can obtain a large amount of aid from other 
engineers, so it should be your duty and your pleasure to impart 
information to your engineering brethren, especially to the 
younger members of the guild. Make friends among men of 
high standing and greater experience than your own and hold 
them. Always see a desirable position ahead of you and strive 
to be prepared for it mentally and physically. Remember that 



134 LECTURE NOTES 

often a strong constitution and a vigorous brain will cause you 
to win where others have failed. Bear in mind that booze and 
business do not mix, and that the demand for sober, steady men 
grows stronger. In men as in machinery what is most wanted is 
reliabiHty. In all things so shape your actions that if failure 
comes to you, you shall have done better than to achieve success 
without deserving it, and so that you can inscribe upon the dis- 
mantled mill or the abandoned mine "all is lost save honor." 

Gentlemen of the graduating class, I congratulate you upon the 
future which looms up before you. The great advances in 
science, mechanics and all the forms of material and mental de- 
velopment achieved during the last fifty years will be dwarfed by 
those of the next half century. Your native land possesses most 
marvelous resources and boundless possibilities. Its great forests 
which should be conserved and increased, its vast water powers 
to be developed, its great stores of fuel to be economically 
utilized, and other natural resources too numerous to mention, all 
of which should be used in the most efficient manner, call for 
earnest, faithful and intelligent engineering work. 

A part of this work it will be your good fortune to do, and I 
have no doubt you will do it vigorously and faithfully, and will 
receive the reward which follows work well done. You will find 
discouragements, but these come to others as well as to engineers. 
The financial rewards of your work may seem small as compared 
with those common in other professions, but there are other 
rewards beside these. The man who builds a successful machine 
enjoys a pleasure which the owner of it does not, and the engi- 
neer who sees scattered over the country great plants which he 
has designed, doing their work well, obtains a great reward even 
if the financial return to him is small compared with that 
received by the stockholders. 

In addition to the work which you will find to do in the line of 
engineering, it is to be hoped that your influence will be widely 
felt in other directions. There are many problems in connection 
with the municipal, state and national government that will 
require solving in the years to come, and no class of men should 
be more able to cast their influence in the right direction in the 



COMMENCEMENT ADDRESSES 135 

solution of these than the engineers. When you consider that 
the cost of building and maintaining one modern battleship is 
greater than the amount necessary to endow and operate Har- 
vard University, Yale University and Stevens Institute, or again 
that the first cost of one of these vessels would build five thou- 
sand model workmen's homes costing $3,000 each, and when we 
see further the insane rivalry between such great powers as Eng- 
land and Germany to see who shall have the most of these 
engines of destruction, while at the same time both countries are 
rapidly drifting toward bankruptcy, it seems as though the time 
was ripe for educated men and everyone else to use their influ- 
ence on every possible occasion against this species of folly. 

When we further notice the so-called alleged statesmen who 
represent the various portions of our country at Washington 
quibbling over trifles and striving with all their might to get all 
the plunder out of the public crib for their own districts, and fail- 
ing to take any action on the great questions which would be of 
untold benefit to their country, it impresses us with the fact that 
there are needed in this country a great many clear-headed, 
courageous men who can think straight and are not afraid to 
express their opinions. There are, and will be, many important 
questions arising, and it should be your duty and your pleasure 
to use your influence at all times in favor of any policy that will 
make for the good of your country and your fellow man. 

I trust you will not be content to be simply skilled mechanical 
specialists of the type that looks with contempt upon Shakespeare 
and Milton because they knew nothing of alternating current 
generators or Pelton water wheels, but that you will strive to 
acquire a broad and liberal culture, kindly sympathy and sound 
judgment; that your influence will be steadily exerted in behalf 
of all things that are of good report in social, civic and national 
life, and that wheresoever you may be at all times and in all 
places your Alma Mater may be proud of you, and that your 
country and the world may be better for your having lived in it. 

To you, gentlemen of the graduating class, who, by success- 
fully completing the thorough and strenuous course demanded of 



136 LECTURE NOTES 

you by this Institute, have demonstrated that you will have the 
ability and industry to acquit yourselves with credit in any work 
your hand may find to do, my parting greeting is, 
''Well done and go forward." 



ADDRESS TO THE CLASS OF 1910 

By 
Walter M. McFarland 

The profession of engineering is very old. If this statement 
should surprise you, think for a moment of some of the great 
engineering works of antiquity, such as the pyramids, the hang- 
ing gardens and irrigation system of Babylon, the great aque- 
ducts, tunnels and roads of Rome, the wonderful buildings, those 
remarkably well worked out specimens of naval architecture, the 
triremes, and the military engines such as the catapult and bal- 
lista. The idea may not have occurred to you, as it did not to me 
until a few years ago, that these ancient monuments represent a 
stage of development which proves that these nations had already 
existed for a long time. For us as engineers they prove that the 
art of construction and the science of engineering had also been 
developing for many years. 

We have no records of engineering schools in those early days, 
although works on engineering were issued near the beginning 
of our era; but perhaps, if we remember that engineers have 
always been given rather to doing things than to telling about 
them, we can understand that there may have been engineering 
schools. We have heard much of the School of Philosophy in 
the Groves of the Academy, where Plato was the great teacher, 
but the men educated there made it their business to write and 
to teach. 

With respect to our own branch of engineering the history of 
the distant past is hazy, although we have the biblical notice of 
Tubal-cain, of the seventh generation from Adam, "the instructor 
of every artificer in brass and iron," and therefore our great 
professional ancestor, as well as the first technical professor on 
record. 

It is a fact, which you younger men will verify as you grow 
older, that scientific explanation almost invariably follows the 
observed phenomenon instead of preceding it. For an absolutely 



138 LECTURE NOTES 

new case this would seem almost inevitable, but it seems to be 
true very often even' where the phenomena, on careful investiga- 
tion, prove to be special cases of some general law. The applica- 
tion of this point is that before there could be a recognized pro- 
fession of mechanical engineering there was necessary the exist- 
ence and recognition of many phenomena and some degree of 
order in the arrangement of such knowledge. This, of course, 
is one of the definitions of science, ''the orderly arrangement of 
knowledge." While there was undoubtedly a large amount of 
work which might properly be considered as mechanical engineer- 
ing dating from very far back (and the excavations of Pompeii 
have shown us small water tube boilers, plumbing, etc., of the first 
century A. D., not to mention the splendid work of Archimedes 
in the third century B. C. and the steam turbine of Hero, nearly 
two thousand years ago), it would probably not be far wrong to 
say that the beginning of the profession in its modern sense 
counts from the time of James Watt, who took the steam engine, 
when it was useful but very inefficient, and so improved it as to 
leave little for his successors except refinement in detail. That 
takes us to about the time of our Revolutionary War, and thus 
makes the profession in its modern sense somewhat more than 
a century and a quarter old. 

Instruction in some branches of the knowledge ancillary to the 
profession has, of course, been a part of the curriculum of 
colleges and universities for a great many years, but without 
attempting to give an exact date, it is safe to say that really 
complete, systematic instruction in mechanical engineering has 
only been carried on for about three quarters of a century. 
Indeed, while Stevens was not the first institution to give instruc- 
tion in mechanical engineering, it was the first one where that 
was made the chief aim. 

If we look over the list of the leaders in manufacturing and 
other pursuits which depend on mechanical engineering at the 
present time, and note that it is the exception when they are not 
graduates of a technical school, we would be prepared to say 
that the usefulness of engineering education has been so 
thoroughly established that it is idle to discuss it. However, 



COMMENCEMENT ADDRESSES 139 

remembering the words of St. Paul, "Prove all things, hold fast 
that which is good," and following such good advice we may 
with profit, perhaps, discuss the subject briefly, so as to feel 
assured that the work is proceeding along correct lines, or, if any 
changes are desirable, we may consider them. 

While I have not the slightest doubt of the absolute necessity 
for technical education, and that in the main the methods fol- 
lowed are correct, it is nevertheless a fact that there is not 
complete agreement as to the value of our present system of 
education, nor as to its details. Some of the critics are so 
obviously ill-informed and biased that it is hardly worth while 
to consider what they say. Others are men who have themselves 
passed through the engineering schools and have made their 
mark in the profession, and their opinions are at least entitled to 
respectful consideration. 

In any such discussion it is important, first of all, to know just 
exactly what is meant by the terms we use, and I am inclined to 
think that much of the criticism is based on an erroneous defini- 
tion of education. The etymology of the word, as you well 
know, means to "draw out" or develop, and I believe that the 
intelligent arrangement of the course of instruction, in accord- 
ance with this definition, is all that can be reasonably demanded 
of the technical schools. Some of the critics, to judge from their 
statements, seem to expect that the schools should do much more 
than train the young men, although, when we think that the 
training given by an efficient school develops mind and character, 
hand and eye, we realize that we are asking a great deal. In 
addition, the critics seem to expect that a young man shall be 
turned out at twenty-one or twenty-two years of age, after a 
four years' course, with the stored-up experience and mature 
judgment which ordinarily only come to a man of forty. They 
doubtless do not intend it as such, but it seems to me that this is 
one of the greatest compliments which the technical schools have 
ever received, because they are expecting something which would 
be little short of a miracle. The fact is that experience and judg- 
ment can only come with repeated observation and careful 
analysis of the data thus obtained in connection with previous 



140 LECTURE NOTES 

knowledge, all of which takes time, or in other words means 
greater age for the engineer. We are told that the chemists have 
discovered methods of aging wines so that in a few months they 
can accomplish what Nature takes years to bring about. No 
chemist of the intellect, however, has thus far arisen who can 
perform the equivalent process for the human mind. 

The technical school does, however, give the graduate one 
enormous advantage in addition to his intellectual training, 
namely, the record, complete to date, of what others have done 
in the profession, and with a knowledge of where to go to seek 
for precedents; so that, although the experience and mature 
judgment are still lacking, when problems arise which are un- 
familiar he knows where to go to get light on them. 

It seems to me so unreasonable to expect that a technical 
graduate shall be able to step into a factory or a consulting 
engineer's office and immediately do the work of leading men 
who have had years of experience, that it has been a constant 
surprise that men whom I know to be of great ability should 
entertain such a view, and yet it is a fact. It is somewhat akin 
to the talk which was very common when I finished my technical 
schooling, and which has now largely disappeared, about the 
relative merits of practical and theoretical men. Men were 
called "practical" usually when they had not been to a technical 
school, but had served a regular apprenticeship in some shop, 
and such systematic knowledge as they possessed came from 
reading or study without the guidance of teachers. The *'theo- 
retical" men were those who came from the schools, and whose 
manual training was, of course, very much inferior, and only such 
as could be obtained in the workshops of the school or college. 
As almost all of the older men were ''practical," they professed 
a great contempt for the young men from the schools, and never 
wearied of pointing out how useless they were. What it really 
amounted to was this: these "practical" men, being older, had 
had numerous opportunities for observing the solution of certain 
classes of problems which had not as yet come to the attention of 
the younger men. Consequently, when such a case arose, the 
practical man could tell at once how to do it, while the man of 



COMMENCEMENT ADDRESSES ■ 141 

the schools had to take some time to study it out. Frequently, 
however, a case would arise which was absolutely new to the 
practical man as well as to the other, and then, almost invariably, 
it was the theoretical man who found the solution. In other 
words, he now had an opportunity to prove the real value of 
technical education in having taught him how to think, how to 
analyze a problem, and how to apply his knowledge to its solu- 
tion. I have not only had this happen often in my own experi- 
ence, but I have run across it repeatedly with other technical 
graduates, and I have no doubt that every other engineer here 
could give similar illustrations. 

There are certain disputed questions with respect to the course 
of instruction which probably will never meet with a solution 
satisfactory to all, because opinions differ so much — such as 
whether attendance at the technical school should follow imme- 
diately after preparatory work or should come after an interval 
which had been spent in the shops, or whether what the English 
call the ''sandwich system," a variation of which is being tried 
at the present time in Cincinnati, would be better. There are 
arguments of weight to be advanced on both sides of these vari- 
ous questions; it has always seemed to me, however, that it is 
better to make the technical school the completion and rounding 
out of education, when the habit of study is still strong, rather 
than to break in on the course with loss of these habits and diffi- 
culty of taking them up again later. 

Another side of the question, however, has come up in recent 
years, and is, I believe, a just criticism against the older course of 
instruction, namely, that sufficient attention had not been given 
to the commercial side of engineering. I hardly think that the 
pioneers who developed the technical schools are entirely to 
blame for this, because from the very nature of things most of 
them were without commercial experience, so that its importance 
did not appeal to them. Moreover, the amount of instruction 
which has to be crowded into the usual four years is so great 
that they might well be pardoned if they were inclined to pay 
more attention to general principles and to grounding the student 
thoroughly in them than thinking about their application, know- 



142 LECTURE NOTES 

ing that this would come after graduation. It was doubtless the 
observation of this undeveloped commercial sense that caused 
some manufacturers and other employers to criticise the technical 
graduates at first, and to say that they were of no use to them. 
It is especially gratifying to remind this audience that your own 
president, Dr. Humphreys, was the first head of any technical 
school to establish a course on the commercial side of engineer- 
ing, and it was peculiarly fortunate for Stevens that he took this 
chair himself, because of his own high standing in the com- 
mercial world. 

It is perhaps very natural for professors whose specialty is 
mathematics, strength of materials, machine design, etc., where 
the limited time requires them to dwell particularly on the engi- 
neering side of the problem, to overlook or omit reference to 
the commercial element, but in the hard world of business the 
element of cost is the one which ranks first. Machines and 
structures must be strong and efticient, but above all it must be 
possible to construct them for such a price as will permit of a 
profit both to the manufacturer and to the user. In other words, 
no matter how satisfactory a machine may be from the stand- 
point of strength, efficiency and adaptability, if it cannot be sold 
at a profit it is a failure, and the engineer who has designed it 
without taking into account the question of costs has failed just as 
completely as though it had proved inefficient or had broken 
down under test. It would be unreasonable to expect the techni- 
cal schools to go into the question of costs in the same detail as 
the factories, but the point is that the importance of minimum 
costs must be emphasized to the students so that it will not come 
to them as a revelation after graduation. 

An effort has also been made to choose the problems which 
have to be solved in the classroom so that they bear some relation 
to the kind of work which the students will have to do after 
graduation. In other words, the problems are not abstract, but 
very concrete, and are taken from those which recur frequently 
in engineering practice. This change is somewhat akin to that 
made in modern languages, where the sentences to be learned are 
now those which will be of some use in real life, and not such 



COMMENCEMENT ADDRESSES 143 

gems of thought, used purely for grammatical illustration, as the 
time-honored one, ''Have you the green umbrella of my wife's 
grandmother?" In the drawing room something of the same sort 
holds, and I know by experience that it is possible to give the 
students in regular work such knowledge of technique that when 
they go into the drawing room of a factory they will not feel 
strange, but can at once do commercial work, only having to learn 
the particular difficulties of that factory. 

The assertion made by some of the critics of technical educa- 
tion, that an engineer can get adequate training in the shop, is 
completely disproved by the experience of some of our largest 
manufacturing companies who have found it necessary, in order 
to get properly trained men for their higher positions, to estab- 
lish a special apprenticeship course for engineer graduates, and 
offer them special inducements to come. The object of this 
course is to familiarize them thoroughly with the details of the 
particular line of business which they could not, of course, get 
in the schools, and when this course, which only lasts a couple 
of years or less, is finished, the young men can start their higher 
work, in which promotion is steady and the reward for unusual 
ability is very great. It is to be noted particularly that this is 
a matter of business, and not philanthropy, to which the em- 
ployers were driven by necessity and these employers would be 
just as willing to give these higher positions to their trades 
apprentices if they had the necessary mental training and ability 
to fill them. 

I know of a case where one large factory rather neglected this 
matter for a year or two, and they found that they were losing 
out in competition, so that they then offered special inducements 
to the technical graduates to come to them. 

In this matter I do not speak at random or in general terms, 
for I have just left one of the largest concerns in the country, 
after eleven years of service, and have watched the whole ap- 
prenticeship system and the career of the college graduate with 
the greatest possible interest. The exceptions are so rare that 
I am entitled to say that every position of prominence outside of 
the financial department is filled by a technical graduate. Within 



144 LECTURE NOTES 

the last few years a night school was established, whose instruc- 
tors were principally engineers and others with a techni'cal educa- 
tion, and some of the graduates of this school (trades apprentices 
who thus made up for the deficiency in their early education) 
have qualified themselves for taking higher positions. 

To the claim that a shop training alone is sufficient to make 
a man a competent engineer at the present time, it seems to me a 
sufficient answer is the existence of the correspondence schools. 
The young men who take the work of these schools are to a very 
large extent skilled workmen who have not had the advantages of 
a thorough education, and who are wise enough to see that they 
will not be competent to take higher places without greater 
mental development. 

Right along this line I may mention a case which came within 
my own experience some years ago, when I was connected with 
Cornell University, where a number of young men, from twenty- 
five to thirty years of age, who were journeymen machinists, 
came to Cornell in accordance with a provision for special stu- 
dents, their object being to get thorough training in mechanical 
drawing and an elementary knowledge of the theory of engineer- 
ing. These men had saved the necessary money and were paying 
their own way. Indeed, in some respects, they were the most 
earnest and satisfactory students I have ever seen. A rather strik- 
ing comment on the thorough training to be obtained in the shop 
is shown by one case which I knew personally, where a man 
arranged to go to a technical school to get certain branches of 
shop work which he could not get in the shop where he was a 
journeyman. This shop only trained a man for some one class of 
work, and had no real apprenticeship system. 

A writer who has said a great deal in disparagement of higher 
education of all kinds has asserted that the technically educated 
men have not made any great inventions or done any great work 
in engineering, and he goes back to the early days of mechani- 
cal engineering, before there were any schools, to cite Watt, 
Stephenson and others. It is too bad that a man at the head of a 
large manufacturing establishment should have forgotten that the 
two men who brought out the most revolutionary improvement 



I 



COMMENCEMENT ADDRESSES 145 

in shop practice in the last twenty years were technical gradu- 
ates. You, of course, know very well that I mean Messrs. Taylor 
and White, the inventors of high speed steel, both of whom are 
graduates of Stevens. I have not taken the trouble to look this 
matter up in detail with a view to making a long list, but many 
names occur to me, as I am sure they will to you, such as Sir 
William Siemens, the father of open hearth steel; Captain 
Ericsson, of Monitor fame ; Mr. James Gailey, who has made the 
latest developments in blast furnaces ; and Julian Kennedy, who 
has done so much for the development of the steel industry. 
The invention and improvement of the telephone were entirely 
due to college-bred men, as you well know, and both Bell, the 
inventor of the 'phone, and Pupin, who has made such a revo- 
lutionary improvement, were college professors. 

It is also worth noting that the men who have done the best 
work in devising systems of paying labor in manufacturing 
establishments — Halsey, Taylor, Gantt and others — are technical 
graduates, although it would seem that, as the "practical men" 
had this field to themselves for so many years, they should have 
been the ones to excel in this "business proposition." 

When we come to the field of electrical development for light, 
power and traction, it is almost absolutely true that the whole 
development is due to college-bred men. Having been intimately 
connected with this class of work for more than ten years past, 
I am in a position to speak of this positively. 

It is rather amusing to note the remarkable attitude of one 
critic, who decries higher education of all kinds and says the 
colleges are frauds. He is compelled to admit that the bulk of 
engineering work to-day is done by technical graduates, but he 
claims that they deserve little or no credit because, he says, their 
work is only copying what was done by the giants of the early 
days, when there were no technical schools. Being himself igno- 
rant of the principles involved, he thinks it as easy a job to build 
a suspension or cantilever bridge of 2,000 feet span as one of 
500 feet. One would have thought that the lamentable failure of 
the Quebec bridge would have opened his eyes, but "none are so 
blind as those who will not see." This same man never wearies of 



146 LECTURE NOTES 

disparaging the college professor, but if I remember rightly the 
professors were the very men who had been constantly warning 
the men in practice that they were making unwarranted assump- 
tions in the case of these huge structures, based on experience 
with much smaller ones, and urging experiments to secure the 
needed information. Bridges on the principle of that at Quebec 
had been built for years, and almost as large. Moreover, the 
builders had had great experience. The failure was due to a 
neglect of precautions which the "college theorist" would have 
insisted upon. 

Some of the critics seem to take the position that men who 
have been fortunate enough to enjoy a thorough technical educa- 
tion would maintain that no men without such an education 
could attain to eminence in the profession. I think you will 
rarely find any technically educated engineer of experience who 
would make such a claim. Every one of us has personal friends 
who, by extraordinary ability and great exertion, have overcome 
the handicap of an incomplete early education, and have by hard 
study put themselves in positions of great responsibility and have 
done splendid work. On account of these relatively few cases, 
to disparage education is a mark of extremely poor judgment. 
Because an untrained man of extraordinary physique occasion- 
ally performs some great thing in athletics, you would certainly 
never find anyone familiar with the training of athletes to say 
that such training is unnecessary. I saw a case at the revival of 
the Olympic games at Athens in 1896, which illustrated this point 
very well. The American athletes won every event in which they 
participated except the Marathon race and one other long- 
distance race. The Marathon race was won by a Greek shepherd, 
whose daily work had, in a sense, given him a rough training 
which enabled his splendid physique to bring him out the victor. 
In all the other events, where training does count, the skilled 
athletes were the victors. A close personal friend of mine, who 
has held some of the highest positions in the shop management 
of large establishments, and who is not a technical graduate him- 
self, once told a lad who did not want to go through school, but to 



COMMENCEMENT ADDRESSES 147 

take up shop work at an early age, that he was making a great 
mistake. Said my friend : 

"I was compelled on account of family reverses to go to work when I 
was a boy of fourteen. By tremendous work and study I have finally 
reached a good position, but I want to tell you that if I had had the 
advantages of a technical education such as are open to you, I would 
have reached my present position years before I did." 

It seems to me that the complete statement about technical edu- 
cation is that the schools and the employers to whom the gradu- 
ates go after they leave should work together in a spirit of mutual 
helpfulness. Disparaging criticism by either party can only do 
harm, while friendly suggestion will be of constant benefit. The 
establishment here of the course in engineering economics is a 
proof of the readiness of the schools to respond to reasonable 
suggestions, and if all the employers will take the same attitude 
as that of the great electrical companies and some others in realiz- 
ing that for their own sake, as well as that of the students, the 
early months in the factory should be looked upon as a sort of 
post-graduate course, we would have a condition of affairs which 
would bring about satisfaction on all sides and the maximum 
efficiency both in the shop and in the school. 

It is almost inevitable in modern life, where wars have become 
infrequent and the commercial class is the dominant one, that 
success should be measured by wealth. Doubtless this is right 
enough, in a way, so long as it encourages thrift and business 
prudence. At the same time it certainly is not the only measure 
of success, and it has often seemed to me that if there is a class 
of men who have just reason to feel proud of their work, it is 
the college professors. I know that many commercial men have 
a way of referring to the opinions of the professors as thougli 
they were always unpractical and not worthy of much respect, 
but it would be easy to show that a great deal of the world's 
progress has been due to the quiet work of these very men. 
The particular point which I have in mind, however, is their 
great opportunity for training the mind and forming the char- 
acter of the young men who are under their instruction. We are 
ready to pay the highest tributes to the genius of the artist, the 



148 LECTURE NOTES 

sculptor and the architect who work entirely with inanimate 
things, but what greater glory can any man ask than to have had 
a really essential part in the turning out of a young man with 
well-trained intellect and high moral character? 

I am very fond of history and I sometimes think that the 
necessities of our technical curriculum have denied our students 
the great benefit which would come if they could give more atten- 
tion to it. If I read history aright, it certainly teaches that the 
essential thing for the stability and permanence of any country 
is the high character of the citizens and their devotion to the 
state. Every one of the ancient nations began to decay when 
wealth became the chief aim in life and the character of the men 
deteriorated. It was no wonder that the hardy barbarians from 
the North should conquer Rome when her own sons would 
mutilate themselves to avoid military service. Therefore, I say 
that the college professor has an unusual opportunity to set a 
personal example of high character before his students, and he 
has a right to feel that his career is a success when the students 
whom he has helped to train fill with credit, both professionally 
and morally, the stations into which they come in after life. 

And now just a word of congratulation and greeting to the 
graduating class. You have worked long and faithfully, not so 
much for this day and the justly prized diploma which is the 
testimony to your faithful work, but rather in equipping your- 
selves for life's battle. So much of the work of to-day that 
makes life easier and happier is performed by mechanical engi- 
neers that I feel you are to be congratulated upon your chosen 
profession. You can be very proud to have your name on the 
roster which has been made illustrious by the great men of the 
profession, and doubtless to some of you it will be given to 
become illustrious yourselves. I certainly hope so. Never be- 
come discouraged because you have not made some wonderful 
discovery, or should you not become immediately famous, for 
you will find as you grow to be more experienced that the great 
bulk of the world's work is done, not by the geniuses, but by 
the men who perform faithfully and conscientiously the work 
which devolves upon them. Mistakes will occur, because every- 



COMMENCEMENT ADDRESSES 149 

one who tries hard to do things is sure to make some mistakes; 
but if, at the end of your career, you can conscientiously feel 
that your duty has always been faithfully performed, you will 
certainly be ready to receive the final commendation, ''Well 
done, good and faithful servant." 



ADDRESS TO THE CLASS OF 1911 

By 
Robert M. Thompson 

I highly appreciate the honor of having been asked to address 
you young gentlemen on this, to you, most important day. I 
know a thousand pleasant duties are calling you, and if I do not 
later say anything that will please you, I am sure it will please 
you to know that I mean to make my remarks brief. 

I have been asked to emphasize to you the great value of 
efficiency. It is surely "gilding refined gold" to advise the gradu- 
ates of Stevens to be efficient. The whole course of your instruc- 
tion here hews to that line. Your institution was founded and 
has been built up by men with whom efficiency was and is a reli- 
gion. From generation to generation the Stevens family has 
produced men, a study of whose lives is worth a thousand essays 
on efficiency, and the lives of men like Morton and Humphreys 
are greater arguments for efficiency than any thoughts I can 
express. Therefore, I am not going to waste your time by 
attempting to instruct you how to be efficient. I assume that you 
will be. But I am going to ask that you be articulate in the 
defense of efficiency. Alas that it should be so, but in these 
modern days, because of a most curious misunderstanding in the 
public mind, "efficiency" is treated as if it were synonymous with 
dishonesty. If two persons, or two corporations, compete in a 
limited field, and one is efficient and the other inefficient, the one 
that is efficient succeeds and the inefficient fails. Those who fail 
cry out and make a great disturbance, but the efficient, busy with 
their affairs, do not talk, and so there has grown up in the public 
mind the belief that there is some wrongful reason why one set 
of men succeeds and another fails. The obvious, the true reason, 
they reject. 

The time has come when good citizens must preach the gospel 
of efficiency. They must teach the public that those who engage 
in business and make money out of it are better citizens and do 



COMMENCEMENT ADDRESSES 151 

better by the community than citizens who engage in the same 
business and lose money; for the making or losing of money in 
a business is a fair test of efficiency. 

I want you to take a national view of production. Do not for 
the time being consider the rights or the wishes of individuals, 
but think of what is best for the nation as a whole. Evidently 
what we want as a nation is a sufficient supply of natural pro- 
ducts to satisfy the needs of our own people, and enough surplus 
to exchange with other nations for those things we desire but do 
not ourselves produce. It is also desirable that, if possible, these 
things be so produced that opportunity may be given each indi- 
vidual to enjoy the intellectual as well as the physical pleasures 
of life. But the community can only give opportunity. The 
individual must fit himself to enjoy the things that are intellectual 
and spiritual. You cannot by legislation make a man either 
frugal, intelligent or happy. 

As a nation, we annually produce from the ground, fashion, 
transport and consume an enormous amount of "real things," 
and the producing, fashioning and distributing of these things is 
what we call "business." There are in this country 90,000,000 
of people. A certain number of them work on the land — some 
as farmers, some as planters, some as miners, and others as 
lumbermen. These men are producers of the "raw material" 
which goes to make up our annual fund. Others work on the 
various railways, canals and steamship lines, and transport this 
raw material to the points where it is to be fashioned by another 
body of men into the shapes in which we desire to consume it. 
Then comes another division of men whose business it is to re- 
distribute the finished product to those who consume it. It is 
obvious that so far as the nation is concerned the important 
thing is that the forces of nature be fully employed, and that 
each unit of labor engaged in production shall so do its work 
that the country's annual product may be the largest possible. 
In other words, that each unit shall work efficiently. 

If we consider the several divisions of labor in this country, 
we find that farmers and planters are not efficient. They have 
so improvidently worked the land that in many cases its fertility 



152 LECTURE NOTES 

has been exhausted, and the phrase "the abandoned farm" has 
come to be a common one. 

The lumbermen have almost exhausted our forests, and have 
done little in the way of renewing them. We are now arranging 
with our neighbors on the north for a supply from their great 
reservoir of this natural wealth until by scientific management we 
are able to build up new forests which can be made to give us 
an ample annual supply while maintaining their capital value. 

With our mines our position is different. The introduction of 
modern machinery and the scientific direction of labor has made 
the cost of working our mines the cheapest in the world. But 
because of inefficient management of the markets we have 
attracted the consuming power of the world to our mines, and 
we are rapidly exhausting them. Mines do not grow again as 
do the forests, and when once exhausted they cannot be renewed. 
Science can accomplish but little more in improving the methods 
of mining, but a scientific management of the markets may secure 
a more equitable return to our country for the products of our 
mines. Let me cite copper, for instance. At our present rate 
of production, it is only a question of time until our copper mines 
will be exhausted, and when that time comes we will be forced to 
buy from other nations the copper which we will still need, at a 
price much higher, you may believe, than the price at which we 
are now selling. Within my business life the production of 
copper, in this country, has increased from 50,000,000 pounds to 
over 900,000,000 pounds per year. Sixty per cent of this copper 
we ship to foreign countries at a price which to-day only pays for 
the labor involved in mining and transporting it, and yields us no 
return for this natural wealth which we are practically giving 
away. If the owners of our copper mines were to combine 
to-day and reduce the output of their mines by 200,000,000 
pounds a year our nation would receive from the foreign coun- 
tries who buy our copper more money for the smaller than we 
receive now for the larger quantity, and the life of the mines 
would be prolonged many years. 

In transportation and manufacture there has been a continuous 
improvement in machinery, but a deterioration in the human 



COMMENCEMENT ADDRESSES 153 

element. The fundamental error of the trades unions in teaching 
that the way to give the masses of the people more "real things" 
is to produce less, has made inefficient workmen, and caused the 
existing conflicts between capital and labor. 

In distribution certain large corporations do their work effi- 
ciently, but the great mass of distribution is done by retailers, 
who are inefficient. The majority of the people and of the voters 
being inefficient, and not understanding the value of efficiency, 
there is a perhaps natural jealousy of those who are efficient. 
Especially is there jealousy of corporations which make large 
profits. The people do not understand that the making of large 
profits is evidence of efficient management, and that the greater its 
profits the more efficient the corporation. The people should be 
taught that a corporation does not retain in its treasury the ''real 
things" which it produces, but turns them all over to the con- 
sumers, and the more it makes the better ofif the public, for there 
are more things to divide. 

In exchange for its product the corporation receives a credit 
against the general fund of "real things/' and this is divided 
among its stockholders. The stockholders, no matter how large 
their credit may be, draw against the general fund only to the 
amount that they consume, and the "real things" represented by 
their surplus credits remain in the fund and are consumed by the 
general public. When the knowledge how and the desire to he 
efficient become general our farmers and planters will be able to 
double the yield of our fields. A wise application of the doctrine 
of conservation to our forests and mines will give us annually 
enough for our wants and preserve for future generations their 
share of our supply of natural wealth. Labor doing its best, under 
efficient leadership, will find that in return it will receive its full 
share of the annual product, because the more men produce the 
more they will get. 

There remains one other great lesson which you can help teach 
to the country, namely, that our working classes are now receiv- 
ing their equitable share — perhaps more than their equitable 
share of the annual product ; that, judged by the experience of 
mankind in other parts of the world, they are receiving ample to 



154 LECTURE NOTES 

keep them well, strong and happy, and, if thrifty, to provide a 
surplus which, saved and invested, will take care of them in their 
old age ; and that if sufficient machinery be provided, and all men 
work efficiently, the necessary product can be obtained by such 
hours of labor as will leave to each individual the opportunity to 
enjoy things intellectual and spiritual, as well as physical. 

Young gentlemen, I have presented to you a serious problem. 
You are familiar with the examples and the precepts of the great 
men who founded and built up this school. You know the truth. 
Do not be content to go out from here and make use of your 
knowledge for the benefit of yourselves alone, but in season and 
out of season, at all times and in all places, be articulate in the 
defense of efficiency. In time we may turn back the flood which 
is threatening our civilization and make ourselves what we ought 
to be : a contented, happy and prosperous nation. Efficiency will 
then be rewarded by the public's approval, as well as by the usual 
rewards of financial and social success. 

Mr. President, permit me once more to express my thanks for 
the opportunity which you have given me to renew my belief in 
the country's future by bringing me in contact with young men 
like those before me. I shall be glad if I have expressed one 
thought which may be useful to them hereafter. 



Part II 

LECTURE NOTES ON SOME OF THE BUSINESS 

FEATURES OF ENGINEERING 

PRACTICE 

By 
Alexander C. Humphreys 



IN GENERAL 

The lectures, addresses, and papers contained in Part I of 
these Notes, written by men who have been successful in vari- 
ous walks of life, have shown you what should be demanded 
of the man who, through a long course of uninterrupted study, 
has been privileged to prepare himself for specialized service. 
You have been shown by men who have been keenly sensitive 
to their own responsibilities how higher education and the 
capacity for service so cultivated and enlarged necessarily 
involves a commensurate responsibility to one's fellows; a 
responsibility which can be neither safely nor happily ignored. 

Running through all of these writings you have found a 
strong current of practicality. You have been reminded con- 
stantly that knowledge and capability are to be usefully em- 
ployed, not selfishly hoarded. Particularly you have had it 
impressed upon you that, as engineers, you will be required to 
employ the forces of nature honestly, usefully and economi- 
cally. This last lesson is of especial value and importance in 
this country at this time, hampered as we are by amateurs in 
reform in our struggles for increased efficiency and honesty 
in business and government in the face of an uninformed and 
misinformed public opinion. 

What you are looking for, we can assume, is real success 
in your chosen profession. Then certainly it should be of 
assistance if you can draw upon the experiences of one who 
probably has had to meet nearly all the difficulties that the 
majority of you have had and will have to meet, and perhaps 
some in addition, and is anxious to warn you as far as possible 
against the errors into which he has fallen. 

You should be interested to know what an employer is look- 
ing for in the employee. I can give you, in advance of your 
graduation, information in this direction; and I can give it to 
you because I was for many years a salaried employee and for 
many more years a salaried employee while also a large employer 



158 LECTURE NOTES 

of engineer-assistants and, still later, an independent employer 
of technical graduates. While, of course, employers are gov- 
erned by varying ideas in making their selections, I can state 
to you what I have been in the habit of looking for; and I am 
inclined to think that to-day, in connection with the keen com- 
petition which is now a feature in nearly all lines of industrial 
work in this country, many employers are guided by the same 
views. 

I would select, first, for honesty, then for thoroughness, 
and then for energy and earnestness. First of all, I do not 
want any man in my employ unless he is honest in his inten- 
tion to work wholly in my interests. Secondly, I do not want 
him unless he will do thoroughly the work assigned to him, even 
if the quantity of work is not large. Lastly, if I can get a man 
who is honest and thorough, and also is endowed with energy and 
earnestness, in other words, one who has a large capacity for 
work, I know then that I have a man who will meet all reason- 
able requirements. Many young fellows, and Stevens Institute 
men among the number, soon give up the employment which 
they first secure after graduation because, as they have often 
expressed it to me, they saw no chance ahead; whereas the fact 
is that they had not yet secured a thorough command of the 
minor details to which they had been assigned. The young 
graduate should be very slow to turn away from work to which 
he is assigned because he sees no advantage to himself in doing 
that work thoroughly. To him the work seems unimportant, 
but on this point he is not yet competent to judge. It may be 
that his employer is primarily or incidentally testing him as to 
thoroughness ; is testing him with what appears to be work of 
little responsibility. The man who performs any duty, no mat- 
ter how humble, anything less than thoroughly has no right to 
expect promotion. The employer who would promote such an 
employee does not deserve loyal service. 

I told last year's class of a case which had just been called 
to my attention. Three young graduates were employed by a 
certain industrial concern and put to work at all sorts of rough 
detail work. They were well paid. One man resigned in a month 



I 



IN GENERAL 159 

or two because he said it was not work suited to the capacity of 
a man who had received a technical education; the second man 
stuck to it for a year or so, grumbhng much of the time; the 
third man went ahead uncomplainingly, performing thoroughly 
and promptly every task to which he was assigned. This third 
man was transferred from one rough job to another for three 
years. Then the manager sent for him, reminded him that his 
two companions had left, one after a very few months, the 
other after twelve months. He then asked this third man what 
had led him to go on with the work assigned to him. The 
young man replied something to the effect that he was perfectly 
satisfied with the fact that he was day by day gaining experi- 
ence, that he was day by day finding something to learn, and 
that he was confident from what he saw of the management 
that there would be a place for him if he could prove that he 
was competent to fill some one of the more important positions. 
The manager then told him that his services were satisfactory, 
that he would now be pushed forward to higher positions, and 
at the end of two more years he would be placed in a position 
of authority and responsibility if he continued as he had begun. 
The result was that at the end of the five years this young man 
was drawing a salary of $5,000 a year, this salary being warranted 
by the fact that he was competent and in sympathy with the 
company's scheme of management. 

There are some who are perfectly willing to do the work 
assigned to them and do it thoroughly, but who do not go 
beyond this in seeking for opportunities to take on additional 
work or to further cultivate their powers in the school of experi- 
ence. These men, lacking in ambition, initiative, or in robust- 
ness of mind or body or both, will probably continue to fill 
minor positions. But their lives are successful as compared 
with the lives of those who have the desire and push to go 
higher but are not willing to perform the necessary prelimi- 
nary drudgery. 

I am continually brought in contact with men who attempt to 
justify their incapacity by claiming that they are men of 
breadth; that they employ narrow men to do their detail work. 



160 LECTURE NOTES 

The fact is, probably, that they have no real capacity except 
to steal the product of other men's brains. 

Do not misunderstand me. I am not advising you to be 
narrow men as opposed to broad men. Broaden your capacity 
for service as fast as you can. The men who do each piece 
of work thoroughly and then try to learn how to do something 
else just as thoroughly will gain in breadth. The narrow man 
is the man who is satisfied with thorough performance in one 
narrow line of effort. 

There are many men of breadth who do employ men to 
do special work for them, work which perhaps their employers 
could not do as well for themselves ; but, almost without excep- 
tion, these men are masters of detail in some lines and so gov- 
ern themselves by an appreciation of the necessity for accu- 
racy and completeness of detail in all lines. 

I have more than once had Napoleon quoted to me as the 
personification of breadth; I then quote him back as the master 
of detail, not only in one department of army administration, 
but in every department. He knew what could be accom- 
plished and the best means to adopt therefor, and knew what 
he had the right to demand from his subordinates. 

The fact that there are superficial men who flatter themselves 
that they are broad, and who succeed in making money through 
reckless push, should not encourage, us to believe that it is not 
desirable for a conscientious man to pass through the drudgery 
of the training period. For one of the former type who suc- 
ceeds there are hundreds who can be found sliding more and 
more rapidly down hill, perhaps starting from watching the 
"ticker" in a broker's office and winding uj> as the shabby-gen- 
teel tramp, or worse. 

The privates in the army of promoters are largely of this 
class, and many of these who succeed as money makers do so 
because they are willing to risk the money of their friends and 
dupes. 

The cry to-day in the industries is for efficiency. Then this 
presents the opportunity for the engineer who has been trained 
to strive for the highest attainable efficiency in his applications 



IN GENERAL 161 

of science to the practical things of life; and here commercial 
limitations and conditions must be kept in view continually. 

Believe me when I say that employers find it quite as diffi- 
cult to secure competent employees, as men out of position find 
it difficult to secure satisfactory employment. Intelligent em- 
ployers are constantly on the watch for their young employees 
to betray their inner selves. The employee may be doing some 
very simple work, but if the intelligent employer sees that the 
work is being done thoroughly and with energy, the chances 
are that he will make a mental note that this man is capable of 
doing something larger. 

Young men who wish to secure remunerative and develop- 
ing employment must be willing to go where that employment 
calls them. Those who insist upon being located in the vicinity 
of New York — for instance — must be willing to recognize that 
their chances are accordingly limited. 

One of the great troubles with young men — and older men 
too — is that they do not complete their work. When they meet 
with a problem which they cannot see at once how to solve 
they fall back on the man above to make good their deficiency, 
not recognizing that it is their duty to go ahead and do the best 
they can and go as far as they can without assistance. Let me 
quote from Mr. Kerr's admirable address to the last graduating 
class: "This is about the time to show your nerve. Don't be 
dazed or baffled, but make a start. Use your wits and you will 
get somewhere, and if you cannot always see the end it will 
constantly get nearer and plainer when you go as far as you 
can and then see how far you can go/' 

A friend of mine last summer had an experience in this 
direction. He was engaged in a most important piece of work. 
His strength was greatly reduced by ill health and he was anx- 
ious to tax his strength as little as possible, and therefore to 
do little more than direct the work of others. But he found 
that his chief difficulty was to get any one employee to finish 
up any one piece of assigned work. After working four or five 
months on this case, he told me that there was only one man of 
the number who had completed any one piece of work assigned 



162 LECTURE NOTES 

to him, and the result was that his health was again broken down 
by the work entailed in making good the deficiencies of those who 
were paid to do the work; and these men were specialists in the 
lines for which they were employed. In such surroundings see 
how the thorough man comes to the front. 

Let me give you an example from my own experience. It 
has to do with a day laborer, but the principle is the same. 
Years ago I had undertaken to push through a piece of out- 
side work which had to be completed within a given time or 
the result would be a considerable loss to my company. My 
directors were reluctant to have me undertake the work, feeling 
certain that it could not be completed within the time limit. I 
took on a large force and organized it in squads for different 
classes of work. One part of the work, and a very important 
one, was to fill in the excavations as fast as the work under the 
surface had been completed. After a day or two, I noticed 
that a young Scotchman, only recently landed and quite green 
at the work, was the only one who could be relied on completely 
to follow my instructions in this class of work. The work 
to be done was easy to understand; the trouble was that there 
was so much monotony connected with it that the majority of 
the men would neglect it unless constantly supervised. I soon 
found that, whether I was looking on or whether I was in some 
other part of the field, this man's work was not neglected. After 
a few days I took him to one side, told him that I was satisfied 
with his work and asked whether I could rely on him to boss a 
small gang if I placed that department of the work in his hands. 
I agreed to back him up if he would pledge himself to inform 
me if the men neglected their work or disputed his authority. He 
expressed confidence in his ability to satisfy me, and I placed him 
in charge as a sub- foreman. The result was that that part of the 
work was done thoroughly and never gave after trouble. The 
outcome was that this man, instead of being laid off at the end 
of this particular job, as the other laborers were, was taken into 
the works and given steady employment at an increase in wages 
of 33 per cent. He was then given an opportunity to learn the 



IN GENERAL 163 

details inside the works and secured employment for life at good 
wages. 

I quite appreciate that some of these arguments in favor of 
thoroughness do not appeal to the highest motives. But there 
is nothing wrong in a man trying to advance his interests and 
it is his duty to make himself so competent that he will never 
be a charge on his friends or society. A duty well performed 
from lower motives frequently leads to the development of 
higher motives. 

A number of times recently I have had drawn to my atten- 
tion the fact that young engineer-students do not really appre- 
ciate what their technical education is doing for them. For 
instance, in a recent interview with a man who graduated last 
year, I was informed that he had learned more in three months, 
running a small plant and being made responsible for the care 
of the plant, than he had learned during the four years at 
Stevens Institute. This is a sample of many cases of a like 
nature which I have had forced upon my attention. This young 
man failed to see that it was largely because of his training at 
Stevens Institute that he was able to learn so quickly how to 
run this plant. It was his training at "Stevens" which had 
qualified him to make this rapid progress in the school of experi- 
ence. Without this preliminary training he might never have 
been able to learn what he had thus learned in three months. 

This lack of appreciation for the part which the college train- 
ing plays in a man's after hfe, and especially his success, is not 
by any means confined to the technical graduate. We fre- 
quently hear men say that they are unable to put their fingers 
upon any one thing for which they can thank their college train- 
ing. No doubt this is true, in a measure, with many men who 
neglect their opportunities; but the man who is so inclined to 
question the value of a college training should bear in mind that 
it is not the facts stored up which are of so much value, but 
rather it is the capacity for straight thinking and reasoning 
which has been cultivated in college. The technical graduate 
especially should have this point in mind when he is inclined, 
in his pessimistic moods, to feel that he has wasted the 



164 LECTURE NOTES 

four years devoted to technical study. Even the man who takes 
up employment in a branch of engineering which has not been 
covered specifically by his college course will find upon con- 
sideration, if he has any powers of analysis, that it is the 
preliminary and fundamental training in science and mathemat- 
ics which has qualified him to take up, with confidence as to his 
ultimate success, his particular specialty. And this brings me 
to another point which is frequently urged against the value of 
a college training, and very often urged against the value of a 
technical training. 

You hear it said that men of high scholarship often do not 
succeed in life. It is true that men who have gone high in 
scholarship frequently are not successful in practice. This 
is because they have failed to learn in the school of experience ; 
for, as I have said, you must bear in mind that the work in 
the school of engineering must be supplemented by equally 
conscientious work in the school of experience. To graduate at 
"Stevens," a man must pass at least 60 per cent in every study. If 
our 60 per cent men succeed in after life, as compared with 
those of a higher grade of scholarship, it is because by natural 
bent and the exercise of common sense and industry they take 
better advantage of the opportunities for training afforded by 
the school of experience, and so they secure in that school such 
a high grade that, averaged with their low grade of 60 per 
cent in the technical school, their general average is still satis- 
factory. Whereas, if the technical graduate who has secured a 
90 per cent average in the school of technology, through one 
cause or another neglects to pursue his studies in the school 
of experience, and so fails even to get a passing mark in that 
school, his general average will still be low as compared with 
that of the man who secured a 60 per cent grade in the col- 
lege and a 90 per cent grade in the school of experience. This 
does not apply in the same degree to the men who graduate 
from an institution like Oxford and then continue to work in 
some of the fields of higher scholarship. Naturally, then, the 
high grade obtained in the college qualifies them for their life's 
work. 



IN GENERAL 165 

As I am trying constantly to show you men, the technical 
education that you get in a school of technology must be sup- 
plemented by the training that you will receive in the school of 
experience. The industrial manager of to-day must be a man 
who has had the opportunity in both schools and has, taken full 
advantage of all his opportunities. In this connection, let me 
refer to a point which I have had forced on my attention a 
number of times since I have been president of the Institute. 
As you know, we are in the habit of calling in engineers from 
outside to lecture to our upper classes on some special features 
in engineering practice. We frequently call in our own grad- 
uates who have won success. I have listened to a number of 
these lectures given by men who are essentially engineers; that 
is, they are responsible more particularly for the strictly 
engineering side of their business than for the commercial side. 
Still I have noticed and drawn to their attention, and received 
their acknowledgment of the truth of my observations, that one- 
half to two-thirds of each lecture is devoted to the practical 
features of their work, and especially to the questions of com- 
mercial limitations under which they have been called upon to 
operate. 

To meet all the responsibilities which have been so placed 
before you, you must be willing and ready to undertake and 
persist in certain studies which may not at first appeal to you 
as necessarily included in the study of engineering science. If 
these studies at first impress you as unnecessary drudgery, let 
me remind you once more that no effort to acquire a command 
of fundamentals either in theory or practice is unimportant, 
and the man who neglects the fundamentals and small things 
— as he considers them — as unworthy of the attention of one 
so talented, lives to learn that the world rewards him who 
concerns himself actively and efficiently with the present task. 

It falls to my lot to make the effort to give you within very 
limited compass some insight into certain features of engineer- 
ing practice which, while all-important, have not generally 
received sufficient attention in our colleges of engineering. 
Particularly is it my purpose to attempt to connect engineering 



166 LECTURE NOTES 

practice, as generally understood, with commercial practice. If 
you are not already convinced, I shall expect to convince you 
that engineering enters into all the industries and all branches 
of commerce. 

Then we are at once concerned with one art or science which 
has to do with the recording of the financial results obtained 
from all human activities. This art, being universal, makes it 
important, if not actually necessary, that the engineer should 
at least be familiar with its principles and should have a work- 
ing knowledge of the methods employed in practicing the art. 

I refer to what you have generally heard spoken of as book- 
keeping; but we shall learn later to differentiate between the 
art of accountancy and the bookkeeping methods employed 
therein. 

Before some of the matters to be covered in this course can 
be considered profitably, an understanding must be had of the 
principles of accountancy. In fact, many of the most important 
questions now pressing for solution and in connection with 
which engineers are depended upon for expert advice, cannot 
be intelligently or intelligibly discussed without this knowledge. 

In each of my classes, I have found that certain of the stu- 
dents have already received instruction, more or less complete, 
in bookkeeping. I am always glad to find that there are some 
of our students who have had this advantage; but let me say 
to such that they can still well afford to give close attention 
to this subject as developed in this department. They should 
be able to get more from this part of the course than can those 
who have previously had no instruction in this line; for they 
are better prepared to digest the matters placed before them 
and they should be more keen in their appreciation of the value 
of such instruction. This appreciation should increase more 
and more as knowledge is gained in the school of experience. 
The value to the individual of advanced instruction depends 
in large measure upon how completely the mind has been pre- 
pared by previous elementary instruction and experience. 

But apart from all of this, you will find that I am covering 
in these particular lectures much that is outside of bookkeep- 



IN GENERAL 167 

ing and accounting and much which the bookkeeper and even 
the accountant, through lack of special training, would not be 
competent to give you. As a warning, I may say that in my 
previous classes I have found that some of the men who had 
received instruction in bookkeeping before coming to the Insti- 
tute made a poorer showing in the examinations than those 
who had not had this previous advantage. Probably this was 
because they thought that they were already so fully informed 
that it was not necessary for them to make any effort to follow 
the subject with me. 

Always remember that the engineer is not so much a scien- 
tist as a man who usefully applies by the most practical, efficient, 
and economical methods the truths of science. 

Therefore, to give your technical studies their full value 
after graduation, you must be prepared to acquire quickly in 
the school of experience the ability to apply practically, efficiently, 
and economically your theoretical knowledge in accordance with 
the legitimate demands of the business world. 

It is to prepare you in some measure to meet these demands 
that I have undertaken to direct this department. 



ACCOUNTANCY 

General Principles 

In the reprints of lectures, magazine articles, and addresses 
which you have been required to read and in my preceding lec- 
tures, you have been furnished with sufficient reason for my 
claim that the engineer should be prepared to practice his pro- 
fession within the limits set by commercial conditions, and that 
also the engineer should be familiar with business methods and 
practice. Especially, he should know the language of business; 
namely, the language of accountancy. Without familiarity with 
this language the engineer is unable to read, except through an 
interpreter, the statements that give the final result of the enter- 
prises in which he is engaged: or, in other words, he must take 
on faith any and every statement which his and other men's 
bookkeepers and accountants make to him. For a simple exam- 
ple let me refer to Mr. Turnbull's lecture where he says : 

"We will suppose that we are doing a simple merchandise business, 
buying and selling. We shall have charged all our purchases to merchan- 
dise account, and we shall have credited all our sales to merchandise 
account. We will assume that our purchases have amounted to $100,000, 
and our sales to $90,000, but we find upon taking an inventory that we 
have goods on hand worth $25,000. Now, if we add the $25,000 to the 
$90,000 at credit of merchandise account, we have $115,000 as against a 
cost of $100,000. It is evident to you, therefore, that we must have made 
$15,000 profit. But to arrive at that in bookkeeping fashion, we debit 
merchandise account with $15,000 profit, and credit profit and loss account, 
bringing down a balance to the new merchandise account of $25,000, being 
the $10,000 balance already at the debit plus the $15,000 profit charged, 
making $25,000 as the value of merchandise and the debit to merchandise 
account with which to commence the new fiscal period. Now we find that 
we have $15,000 to the credit of profit and loss, but we have various 
expense and other debit accounts affecting the result of the business, and 
we debit profit and loss and credit these various accounts with their 
respective amounts (we may have also credit balances to other accounts, 
such as interest — affecting the result, and these we credit to profit and 
loss), and assuming that as a net result of the various debits and credits 
to profit and loss we have a balance of $10,000, this then is the net gain 
for the year, and we transfer it to our individual account by debiting 
profit and loss and crediting our account." 



I 



ACCOUNTANCY 169 

I have found with some of my classes that this statement 
as written could not be followed by a majority of the students. 
I am certainly warranted in believing that the members of our 
senior classes (having been subjected to the "weeding-out" 
process for three years) are above the average in intelligence 
and ability to follow out a more or less abstruse proposition, 
and yet they experienced difficulty with this simple proposition. 
The trouble, then, is unquestionably in the fact that the stu- 
dents do not understand the language in which the statement 
is made. Part of Mr. Turnbull's statement is made in the 
language of everyday life and part in the language of the 
accountant. 

Now, let me make this same statement, employing only the 
language of everyday life, and there is not a member of the 
class who cannot follow me. 

Jones engages in a simple merchandise business, buying and 
selling. He purchases merchandise which costs him $100,000. 
Three quarters of that merchandise, or what has cost him $75,- 
000, he sells during the year for $90,000. The expenses for 
operating the business for the year amount to $5,000. He has, 
therefore, made a gross profit on his sales of $15,000, and it has 
cost him $5,000 to carry on the business in connection with those 
sales, leaving him a net profit of $10,000. As this gross profit 
of $15,000 was made on the sale of only $75,000 worth of his 
merchandise, he still has $25,000 worth on hand, subject to 
sale ; and this fact should show on his books. 

The statement as thus made a schoolboy can follow. But 
here it is to be borne in mind that in business we must have a 
method of recording our results which is concise and based 
upon principles capable of universal application. If the engi- 
neer — and especially the engineer who engages in industrial man- 
agement — expects to be able to read the systematized records 
of business results without depending upon outside interpreta- 
tion, he must, then, as I have said, be able to read with some 
facility in the language of accountancy. In the example that I 
have given from Mr. Turnbull's lecture (and it is an extremely 
simple example and selected by him for that reason) we have 



170 LECTURE NOTES 

shown that the statement could not be followed by a majority 
of the members of our senior classes without additional explana- 
tion or interpretation. But it is to be borne in mind that that 
statement is made only in part in the language of accountancy. 
We may assume, then, that if it had been made entirely in the 
language of accountancy it would have been absolutely unintel- 
ligible to those who had not already had experience in accounting. 

I think, then, that this presentation of the subject, in connec- 
tion with the facts and arguments which already have been 
advanced, should convince you that a knowledge of accounting 
is not only important but necessary to the engineer who aims to 
fill satisfactorily any managerial position. Now, I do not expect 
to be able to make bookkeepers of our students. This is not 
necessary, nor is it even desirable. I only aim to give them such 
a knowledge of the principles of double-entry bookkeeping that 
they will be able to read without assistance the record of results, 
for it must be borne in mind that unless, by detailed analysis of 
the statements of account, you are able to detect inefficient and 
uneconomical items in the management, you are certainly unable 
to introduce the necessary corrections. A competent analysis of 
accounts is at the very foundation of efficient and economical 
management. 

The bookkeeper should be trained to do the actual work of 
l)Ookkeeping correctly, neatly, and rapidly. He may be com- 
petent as a bookkeeper, but not competent as an accountant. 
That is, he may be able, with accuracy and rapidity, to follow 
the lines laid out for him by the accountant, but he may not 
"have such an understanding of the principles of accountancy 
and the details of the business as will enable him to lay out 
for himself the system of accounts. 

It is quite possible for the members of this class to obtain 
such a knowledge of the principles of accountancy that they can 
direct such an expert bookkeeper as to the proper methods to 
be followed, without having that expert bookkeeper's facility in 
the actual performance of the work. 

I have been told more than once by young men who have 
taken courses in bookkeeping in commercial colleges that they 



r 



ACCOUNTANCY 171 

regarded it as time wasted, because the bookkeeping methods 
followed in different establishments so varied that very likely 
after having learned certain methods in the commercial college 
they would be required to take a position where these methods 
had no place. If this is a fair statement of what is done in 
some of the commercial colleges, it simply goes to show that 
those colleges teach methods and not principles. I am reluc- 
tant to believe that this is true. It is true that the methods 
followed in different business establishments vary to a great 
extent. The methods followed generally in America are different 
in part from those followed on the Continent of Europe. But 
the same general principles are included in all systems of 
double-entry bookkeeping, and if our students get a firm hold 
on those principles they can, with some little effort, analyse the 
statements prepared from any well-kept set of double-entry 
books. It may be necessary to have the details of accounts, and 
the like, explained, but such explanations can generally be 
obtained when necessary. 

Many authors of text-books on bookkeeping and accountancy 
make little effort to explain principles. Some set out certain 
definite rules to be memorized and expect that the students, 
when they have to decide some questions as to principle or 
method, can select the right rule and apply it properly. This 
may work satisfactorily for bookkeepers, but certainly it can- 
not work satisfactorily for accountants, and especially would it 
be unsatisfactory in the case of men like yourselves, who prob- 
ably will be called upon in this connection to deal with principles 
only. 

Here it is to be noted that some of the text-books on book- 
keeping which fail to teach principles are particularly strong on 
methods. It is quite possible that some of you, who might be 
assisting the bookkeeping department of some concern to record 
fully and correctly the results of an industrial business, might 
find it of distinct advantage to refer to some of these authori- 
ties, who are sometimes able to suggest legitimate shortcuts for 
the reduction of clerical labor. If the engineer-student had 
previously obtained a fairly good grasp of the principles, he 



172 LECTURE NOTES 

might, working in cooperation with a good bookkeeper, be of 
great assistance in utihzing and developing efficient methods of 
cost keeping and accounting. 

I have referred to the double-entry system, or the Italian 
system, as it is sometimes called. Mr. Turnbull in his lecture 
has shown that there are two systems, the single-entry and the 
double-entry systems. The single-entry system does not espe- 
cially interest us, because it is employed by retail concerns only; 
or, perhaps, to be more accurate, it should be employed in such 
cases only. As will appear later, the single-entry system does 
not afford any check as to the correctness of the transactions 
recorded, whereas the double-entry system does afford as com- 
plete a check as can be devised. 

There is often some misunderstanding as to the meaning of 
double-entry in this connection. Let me say at once that it 
does not mean that for every entry made by the single-entry 
system, there are two entries made by the double-entry system. 
It does mean, however, that in every transaction the amounts 
involved appear upon both sides of the final book of record. 

To understand this a little better, let us go back. Every time 
that Jones made a purchase of merchandise in accumulating his 
$100,000 worth of merchandise stock, the man from whom he 
purchased made a sale; and every time that Jones made a sale 
of part of that merchandise, the man to whom he sold it made 
a purchase: that is, for every sale there was a purchase and 
for every purchase there was a sale. Or, for every credit there 
was a debit and for every debit there was a credit. And this 
is true even though each of these credits and each of these 
debits do not appear separately on the books of account. As 
you will see later, by the time the transactions are finally 
recorded on the ledger many credits and many debits may have 
been consolidated ; but the fact remains that each side of each 
transaction will in time find its place in the final record. You 
know the old saying, that it takes two to make a bargain. 

Then, in the double-entry system, in every transaction, in 
one way or another, both the credit and the debit sides of the 
transaction are recorded. If Jones buys from Robinson $100 



ACCOUNTANCY 173 

worth of merchandise, Robinson sells to Jones $100 worth of 
merchandise, and if both sides of the transaction are recorded, 
$100 appears on each side of the final book of record, namely 
the ledger, and these two amounts balance each other; and 
this is true with all transactions. Hence in this final book of 
record, if the books have been correctly kept and we draw off 
a statement showing the debit or credit balance of each account, 
we will find the sum of the credit balances equal to the sum 
of the debit balances ; or, if, as some bookkeepers do, instead 
of, or in addition to, taking the balances, we take the debit 
and credit footings of each account, the sum of all the credit 
footings will equal the sum of all the debit footings. If such 
a balance is not obtained, namely, if there is a difference 
between the sum of the debit balances and the sum of the 
credit balances or between the sum of the debit items and the 
sum of the credit items, we know that some mistake has crept 
into the work. Then the error or errors must be located and 
corrected before further progress can be made. 

While it is true that notwithstanding the check obtained 
through this balancing of credits and debits against each other, 
errors may creep in because two errors of a like amount may 
be made which will balance each other, or an amount which 
should be entered in one account may be entered in the correct 
side of another account, still, this does not disqualify the double- 
entry system, for after years and years of experience it has been 
found to afford as complete a system of checks as it has been 
so far possible to devise. 

I have spoken of the book of final record as the ledger. It 
might perhaps seem more in order if we first took up the pri- 
mary records and then went on to the final record ; but the result 
we are looking for is to be found in the ledger. Therefore, 
I will first consider the result and then work back to the 
means employed to obtain the result. 

If a member of this class were treasurer of the Athletic 
Association and had occasion to distribute against the several 
athletic teams certain items of expense, he might perhaps take 
a sheet of paper and put down headings to designate the several 



174 LECTURE NOTES 

teams. As each item was analysed he might determine what 
per cent thereof was to be charged against each team. Having 
determined the per cent he would figure out and put under the 
proper heading the amount so found. He would do this for 
each item to be distributed. Having finished this work of dis- 
tribution or classification, he would foot up the amounts in 
each column and then, to check up as to the correctness of his 
work, he would see if the sum total of these several amounts 
as distributed against the several teams, equaled the sum total 
of the items distributed. The several items expended by the 
treasurer for the benefit of the several teams would be to his 
credit and to the debit of the respective teams. Then the sum 
of the debits, as distributed against the several teams, must 
equal the sum of the items on the treasurer's memorandum 
of items, to his credit. In a simple case of this kind probably 
the actual necessity would be met by such a method carried 
out on a loose sheet of paper, though it would be then necessary 
to make some final record in case some question might arise in 
the future. But in a business of any size, the amounts of 
money which are spent and the amounts of money which are 
received, and all transactions in which no money actually passes, 
have to be recorded in permanent form and by such a system 
that at any time in the future the facts can be shown fully at 
a moment's notice. If a man is owing us money and from time 
to time he is making payments thereon and is making further 
purchases from us, we must have one place where these several 
transactions can be summarized. That is, we must keep an 
account with him. Or, to speak in a more general way, to 
analyse the results of our business, we must be prepared to 
determine what the different branches of our operations have 
cost us, what the different branches have returned to us in 
income, and what has been the final result either in profit or in 
loss. It will be necessary, then, to classify these different items 
under proper headings, these headings or titles of accounts to 
be self-explanatory as far as possible. These accounts must be 
so kept as to lend themselves most completely to analysis. The 



ACCOUNTANCY 175 

book in which the facts are so summarized, classified, and stored 
is called the ledger. 

In the double-entry system all debit entries are carried into 
the left dollars-and-cents columns and all credit entries into the 
right dollars-and-cents columns. This is the case with the 
ledger and all the other regular books of account. Sometimes, 
as in the ledger, this separation is accomplished by dividing 
each page into a debit and a credit side by a vertical ruling 
through the center of the page. Sometimes, as in the cash- 
book, the two pages which open opposite to each other are 
employed as a couple, the left page for debit items and the right 
page for credit items. Sometimes, as in the journal, the debit 
and credit dollars-and-cents columns are side by side at the 
right side of each single page, the debit column, however, being 
to the left of the credit column. No matter what may be the 
special ruling employed, the credit column is always to the right 
of the debit column. This is an arbitrary arrangement. If it 
had been decided originally to carry the debit items to the right 
side, and the credit items to the left side, the accounts could 
have been kept just as accurately; but it is at once apparent 
that for general convenience there should be, the world over, 
a uniform practice in this regard. Fortunately, then, this 
arrangement obtains the world over. 

But here comes in a point that is a frequent cause of con- 
fusion, especially in the mind of the man not familiar with 
accounts. Suppose I am keeping an account with a man: If I 
make out a statement of that account from my standpoint, that 
is, from my side of the transactions, the amounts which I have 
paid to him will appear on the credit side of my statement, 
and the amounts which he has paid to me will appear on the debit 
side of my statement. But, suppose that he, from his bookSj 
renders the statement of account to me, then the statement is 
prepared from his standpoint, and while the two statements may 
be correct and identical in every particular, not varying to the 
extent of one cent, still every item which on my statement of 
account appears on the debit side will, on his statement of 
account, appear on the credit side, and vice versa. Unfortu- 



176 LECTURE NOTES 

nately, it is not always apparent from the heading of the state- 
ment from which side of the transaction the statement has been 
made. The parties directly concerned have their special knowl- 
edge to guide them as to the facts, but others who may be inter- 
ested may be unable to read the statement. It is in such matters 
as this that the European accountants are inclined to be more 
uniform and precise in their practice than those of America. 

To repeat, every item involved in our several transactions 
finally must be recorded in the ledger, and, if the record has 
been correctly kept, the sum of the items on the debit, or left, 
side will equal the sum of the items on the credit, or right, side, 
and unless they do so balance we must accept the fact that 
at least one error has been made which must be found and 
corrected. 

Before passing on, let me urge you to consider carefully the 
point above made as to the reversal of the debit and credit 
items on the two sets of books as kept by the two parties to 
any one transaction. It is necessary to appreciate fully this 
point to understand why a ledger balances, and why in post- 
ing from the cash-book to the ledger, as later to be explained, 
the items on the left (debit) side of the cash-book are posted 
on the right ( credit) side of the ledger, and the items on the 
right side of the cash-book are posted on the left side of the 
ledger. 

We now come to the questions : How are these items obtained 
for the ledger? What is the basis for this summarized final 
record ? 

The system of primary records which forms the basis for 
the ledger entries varies very considerably, but in general we may 
say that the three main books of account are the cash-book, the 
journal, and the ledger. Under the head of the journal can be 
included certain subsidiary books, which perform certain parts 
of the journal's duty. 

Let us first consider the cash-book. Keeping track of our 
cash expenditures and cash receipts is, of course, of primary 
importance. Therefore, we are warranted in maintaining a 
special book for this purpose which will contain the facts in 



ACCOUNTANCY 177 

regard to each transaction in some degree of detail. In the 
cash-book each left-hand page is for debit entries and each 
right-hand page is for credit entries. All items are entered in 
chronological order. The debit and credit entries of even date 
are made on the pages opposite to each other. If there are more 
entries of a certain date on one side than on the other, and so 
one page is filled up while the opposite page is only partly 
filled, the blank spaces are not filled, and the next two pages 
are opened with entries of even date. The reason for using a 
full page for debits and a full page for credits instead of divid- 
ing a single page into debit and credit sides, is because there 
should be sufficient room to make each entry in detail and it is 
desirable that the record should occupy only a single line. 

Let us first think of what is meant by cash account. It is 
an account kept with ourselves. If there were only one owner 
of the business, then cash would really represent that owner. 
But, even then, cash would have an identity of its own as 
will be seen later. Suppose there are two partners to the busi- 
ness and each puts into the business $5,000 as capital. Then, 
certainly, when that money is put into the business for the 
benefit of both, each man should be credited individually with 
$5,000. The business as a whole should credit each man with 
$5,000 and, therefore, the business as a whole should be debited 
with each $5,000 received. In the cash-book, which represents 
the business as a whole, these entries should appear on the debit 
side. When cash receives money, that is, when the business 
receives money, it must debit itself with that receipt. On the 
other hand, when, in the course of business, cash pays out 
money, cash account must be credited. 

When zve receive we become the debtor to the one who gives. 

When zve give we become the creditor to the one who receives. 

Even in the case of a business which is owned and controlled 
by a single proprietor, the owner of the business may be con- 
cerned in many other enterprises, but his relation to this par- 
ticular business must be clearly shown in the books of this con- 
cern. Cash account has been made . the custodian of this part 
of his money, and, therefore, cash account must be debited 



178 LECTURE NOTES 

and the proprietor as an individual is credited through an 
account which may be called capital account. * This is more 
readily apprehended in the case of a stock company in which 
the capital is supplied by many individuals in widely varying 
amounts. Here it is evident that the business as a whole must 
account to each individual stockholder for the capital he has 
invested with the concern. The business as a whole has 
received the money and placed it in the cash account and 
hence the cash account is to be debited and the individual stock- 
holder is to be credited. This credit to the stockholders is 
generally shown in a general account called "Capital Stock," or 
"Common Capital Stock," or "Preferred Capital Stock," as may 
be necessary to indicate the character of the participation in 
ownership. The individual holdings are certified to by stock 
certificates issued to each stockholder. As these stock certifi- 
cates are issued, credit is given on a capital stock ledger or 
record; and as the certificates are cancelled, owing to transfer 
of ownership, the proper individual accounts are debited, and 
the accounts of the new owners credited for the new certificates 
issued in exchange and at the same time the surrendered certifi- 
cates are cancelled. This is a case of a supplementary or indi- 
vidual ledger in which are given the details as to individual 
debits and credits, the general conditions only being shown on 
the general ledger. It should be unnecessary to point out that 
the sum of all the credit balances shown by the individual 
ledger should correspond exactly with the credit balance of the 
one capital account in the general ledger. The latter shows 
the amount of capital which the concern has to account for (is 
liable for), and the first shows who are the individuals who 
own the stock and to whom the company is liable. 

Then it can be seen that capital account in any of these 
cases should be credited with the capital invested in the busi- 
ness; that capital as received will be recorded in the cash-book, 
and as it is received by cash, cash should be debited; that 
capital (collectively and individually) should be credited. How 
is this part of the record made? 

The entry on the cash-book is made on the left or debit 



ACCOUNTANCY 179 

side, and shows that cash is debited, as it should be. But the 
descriptive matter of the entry also shows from whom the money 
is received and why it is received, and therefore without any 
additional entry it shozvs to what account and to whom it should 
be credited. So we find that the one entry on the debit side of the 
cash-book also records the credit side of the transaction. This 
is an important point and must be fully comprehended. 

Now let us follow through in detail the entries covering one 
of the payments made to cash on account of capital. We will 
assume that we have to do with a stock company; the shares 
being $100 each and issued at par. 

John Smith subscribes for 100 shares, for which he pays 
$10,000. The entry is made on the debit (left) side of the cash- 
book; — first the date received, then the title of the account 
(Capital), then the name of the man from whom it is received 
(John Smith), and then the amount ($10,000). In due time a 
stock certificate will be issued to Smith, and on the stock ledger 
he will be credited with the ownership of 100 shares of stock, 
the record including the detail as to the number of certificates 
issued, the number of shares covered by each certificate, and 
the serial numbers of the certificates. Probably a single certifi- 
cate of 100 shares would be issued and the record would be 
so made, showing the serial number of the certificate for identi- 
fication. This takes care of the liability to the individual. 

When the other cash-book entries are being "posted" into 
the ledger, from the debit entry on the cash-book (that is, 
debit to cash because cash has received the $10,000), capital 
account in the general ledger will be credited with $10,000. 

So we see that in posting from the cash-book to the ledger 
we post a debit entry in cash to the credit side of some account 
in the ledger. And this reversal in the posting is due to the 
fact that we are taking note of both sides of the transaction. If 
cash is debited for money received from John Smith on capital 
account, capital account must be credited, and we must also 
record the fact that John Smith is the individual to whom the 
business is responsible for that part of the capital. We have 
now seen that capital account is credited on the general ledger, 



180 LECTURE NOTES 

and John Smith, the individual, is credited on the subsidiary 
book called the stock ledger. 

This posting of the credit in the two ledgers does not con- 
stitute two credits against a single debit as has been suggested 
by some of the students, because it is the general ledger which* 
shows the liability as a whole and the stock ledger shows only 
how this liability is apportioned. The stock ledger simply 
shows the details in connection with the more general record 
in the general ledger. 

But now it may be said, There is no double entry in the 
general ledger; there is a debit to cash which is recorded on 
the debit side of the cash-book and this debit has served as 
the basis for posting $10,000 to the credit of capital account 
in the general ledger, but there is no debit entry in the ledger 
to balance this credit entry to capital. 

To this objection I reply that in the general ledger, there is kept, 
or there should be kept, a cash account. This account will repre- 
sent cash's side of each transaction; that is, the opposite side to 
that represented by capital account (or John Smith's capital 
account, if we kept all the individual capital accounts in the 
general ledger instead of only summarizing them under the 
general heading of capital account). Having posted the $10,000 
entry from the debit side of the cash-book to the credit side of 
the capital account in the ledger, it now remains to post the entry 
into cash account in the ledger. But as this cash account rep- 
resents the same side of the transaction as that represented in 
the cash-book, we post from the debit side of the cash-book to 
the debit side of cash account in the ledger. But as all the entries 
on the debit side of the cash-book must be posted into the cash 
account in the ledger on the debit side of that account and all the 
credit entries of the cash-book into the credit side of the cash 
account in the ledger, we may as well wait until a number of 
them have accumulated and post them as a sum into the ledger. 
The general custom is to "close" the cash-book once a month. 
During the month the individual items have been posted from 
the cash-book to the ledger, item by item, to the several accounts 
involved, the debit items to the credit side of these ledger accounts 



ACCOUNTANCY 181 

and the credit items to the debit side of these ledger accounts. 
Thus we have classified or distributed the several cash debits 
and credits to the credit or debit of the respective accounts 
opposed to cash in the several transactions of the month. Now 
we post the total footing of all the entries appearing in the debit 
columns of the cash-book to the debit of cash account in the 
ledger, and we post the total footing of all the entries appearing 
in the credit columns of the cash-book to the credit of cash 
account in the ledger. So we have, item by item, all the debit 
entries in the cash-book distributed and posted to the credit side 
of the several accounts in the ledger; and, item by item, all the 
credit entries distributed and posted to the debit side of the sev- 
eral accounts in the ledger ; and all the debit entries of the month 
posted in one amount to the debit side of cash account in the 
ledger, and all the credit entries of the month posted in one 
amount to the credit side of cash account in the ledger. So 
every entry in the cash-book has been posted on both sides of 
the ledger; for every debit there has been a credit and for every 
credit there has been a debit, and so as far as cash items are 
concerned the balance in the ledger between debits and credits 
is maintained. 

Day by day, as the cash transactions are completed, that is, 
the money is received and the money is paid out, each transac- 
tion is entered up separately on the cash-book. Cash received 
is entered on the left page, namely the debit page, and cash paid 
out is entered on the right page, namely the credit page. The 
fact that debit entries are made to the left and credit entries to 
the right, must be memorized, for, as I have said, it does not 
depend upon principle; it is an arbitrary arrangement, fortu- 
nately accepted by all, so that uniformity of practice through- 
out the business world is secured. 

Take another item: — We pay out money for the salary of 
the bookkeeper during the first month. That amount, being 
paid out by cash, must be credited to cash; that is, "Cash" 
has accounted to that extent for the money entrusted to it. 
But it must be charged against either the individual or some 
account which keeps track of this part of our year's expenses, 



182 LECTURE NOTES 

say salary account, or expense account, according to how we 
classify this item of expense. Again you see that what is written 
up as a credit on the right side of the cash-book is posted as a 
single debit to salary account in the ledger; at the end of the 
month, the total footing of the cash credit columns will be posted 
to the credit of cash account in the ledger and this item of cash 
paid to the bookkeeper will be included in this total. So we 
have all the credit items on the cash-book classified and dis- 
tributed throughout the ledger on the debit side of the accounts 
concerned and all these cash credit items posted in bulk in the 
ledger on the credit side of cash account. 

Of course, there should be no reversal of the posting from 
the cash-book to cash account, because cash account in the 
ledger means exactly the same as in the cash-book; that is, 
we are considering the same side of the transaction in the 
ledger that we have considered in making the cash-book 
entries. From each side of the cash-book we have posted into 
the ledger the implied side of each transaction, item by item, 
from the debit side of cash-book to credit side of ledger, and 
from credit side of cash-book to debit side of ledger. We 
have later posted to the same side of the ledger as that in 
which the items appear in the cash-book, the total of these 
items, and so we have on the ledger for every debit a credit 
and for every credit a debit. We find them in one case in bulk 
and in the other case itemized. That is, those amounts which 
have been posted from the debit side of the cash-book and so 
appear item by item on the credit side of the several involved 
accounts in the ledger, also appear as a single amount on the 
debit side of cash account in the ledger. And so the ledger 
accounts, as far as cash items are concerned, are kept in balance. 

I have written this at great length and repeated myself 
advisedly, for I have found in my classes that the students 
seem to have great difficulty in understanding the reason for 
this reversal in the posting from the cash-book to the ledger. 
Until they do fully comprehend this point, they fail to under- 
stand the underlying principle of double-entry bookkeeping. 



ACCOUNTANCY 

Methods 

In this second lecture on accountancy I shall deal more par- 
ticularly with methods, but in my desire to enforce a right under- 
standing of principles, I shall not hesitate to repeat myself. 

As is my practice, I shall here try to answer questions which 
have been suggested by my previous talks, and I shall have 
no regrets if I set your minds working on still other more 
advanced questions. 

Let me first repeat that I am not trying to make bookkeepers 
of you but to give you the opportunity to acquire a knowledge 
of the principles of accountancy. 

Some of you have been puzzled at the distinction I have 
drawn between the accountant and the bookkeeper. 

To be an efficient bookkeeper a man should be a good pen- 
man, writing a neat and legible hand, and preferably writing 
with some degree of rapidity. He should be able to add long 
columns of figures accurately and rapidly, and preferably more 
than one column at a time. He should be able to add a verti- 
cal column of figures with the same accuracy and rapidity, 
whether adding up or down; and he should have equal facility 
with a horizontal column, whether adding from left to right or 
right to left. He should be able to subtract accurately and 
rapidly. He should have the ability and temperament to enable 
him to concentrate his mental processes continuously for many 
hours upon details, so that he will not be liable to make mis- 
takes due to absent-mindedness, such as reading 657 and writ- 
ing down therefor 756. He should have a certain sharpness 
and alertness of mind to enable him to determine quickly where 
to look for the most probable sources of error when his accounts 
refuse to balance. It will also be a great advantage if he has 
the capacity to originate labor-saving bookkeeping methods 
specially applicable to the business in hand. If the man is big 
enough, the bookkeeper can develop into the accountant. 



184 LECTURE NOTES 

To be capable as an accountant, much of this skill of hand and 
readiness of performance is not actually necessary. The 
accountant must be able to direct the bookkeeper. Therefore, 
he should have a complete knowledge of the principles of 
accountancy and a sufficient knowledge of business methods and 
practice in general to qualify him to apply these principles to the 
requirements of any particular business. He should be able to 
recognize where his special training and knowledge should be 
supplemented by the special training and knowledge of those 
skilled in the technical details of the business. He should be 
competent to originate such a system of reports as will place 
before the management, comprehensively and in detail, the 
results obtained from the business. Thus it is seen that the 
accountant must be much more than a bookkeeper. 

It is true that most expert accountants are or have been expert 
bookkeepers. Through lack of practice in the actual keeping of 
books they may have lost some of the manual and mental dex- 
terity required to perform accurately and quickly, but the train- 
ing so gained is a necessary qualification in originating methods 
to meet varying requirements through the application of the same 
principles, and in the reading and understanding of books and 
accounts wherein the same principles have been applied by means 
of widely varying methods. 

We may, then, in some degree liken the distinction between 
the bookkeeper and the accountant to the distinction between the 
mechanic and the engineer. 

Here at "Stevens," in training you to be engineers, we put you 
through a limited drill in the shops, not with the idea that we can, 
during the time at our disposal, qualify you as mechanics, but 
that we can give you some appreciation of the principles involved 
in efficient shop practice, and of how the engineer's designs are 
realized in the shop. And in this connection you are shown in 
principle, if not in detail, that the engineer must modify his 
designs to conform to efficient and economical shop practice. 

If before coming to "Stevens" the student has "served his 
time" as a mechanic, so much the better if he also has the men- 
tality and determination to be something more than a mechanic. 



ACCOUNTANCY 185 

Thus with this course in the principles of accountancy, it is 
better if the students have had some training in bookkeeping; 
such training is not, however, necessary and is a handicap if it 
leads them to depend upon their acquired knowledge of methods 
and so neglect this instruction in principles. 

Coming now to a consideration of some of the bookkeeping 
methods employed to meet the requirements of accountancy, we 
see at once that these methods must provide a correct and per- 
manent record of all transactions in which money or the equiva- 
lent has been exchanged. 

The scheme through which these methods are to be applied, and 
the actual practice of the methods, must be such as to meet all 
requirements just as far as is possible without allowing the book- 
keeping to become of more importance than the transactions 
themselves : 

1. The record should be completely self-explanatory so that 
at any time in the future the exact facts in regard to any tran- 
saction may be recovered without the assistance of memory or 
verbal explanation. 

2. All the transactions should be so classified that their com- 
bined effect over any given period or at any time during that 
period may be ascertained with ease and accuracy. 

Let me acknowledge at once that these two objects are not 
easily attained ; nevertheless, we should never be satisfied with 
anything less. 

In the effort to develop a completely self-explanatory record, 
unless a controlling common sense is continually exercised, a 
system of red tape may be developed which will be out of all pro- 
portion to the actual requirements of the business. The engineer 
is constantly required to keep proportions in mind; here is an 
excellent place to exercise his developed faculty in that direction. 

In the effort to develop efficiency in methods, over-development 
into "red tape" must be guarded against continually. This warn- 
ing is now particularly timely for the reason that "efficiency" is 
a fad with many who have no real appreciation of what the term 
covers and who are an example of the blind attempting to lead 
the blind. Here is required to the very limit the coordination 



186 LECTURE NOTES 

to be obtained only by the reaction upon each other of theory and 
practice. Many of the faddists referred to are weak both in 
theory and practice. 

On the Continent of Europe the bookkeeping systems are often 
burdened with red tape. The same record is often repeated in 
various forms. Facts which are fully developed and recorded in 
books outside of the regular books of account are again recorded 
in detail in these regular books of account. 

In Great Britain, and perhaps still more so in this country, 
such costly repetitions are more often avoided. 

There is something to be said in favor of each system. By what 
we may call the continental method, the more complete record is 
to be found in the regular books of accdunt and, clerical labor 
being cheaper, the additional cost is not so serious as it would be 
with us. 

Here we save time, which saves money, and for the ordinary 
run of business our records are less complicated. 

But in connection with our practice it is of still greater impor- 
tance than with the continental practice that all our letter copy- 
books, invoice copy-books, contract books and all subsidiary and 
statistical records should be kept accurately and carefully pre- 
served for reference in case of future question or dispute making 
it necessary to follow the condensed record as found in the regu- 
lar books of account back to the primary and subsidiary records. 

We are now naturally led to consider the question: What are 
the books usually employed in double-entry bookkeeping? 

Whatever the system of bookkeeping, certain books should be 
kept for our safety as well as for our convenience, such as letter- 
press copy-books in which every letter and every accompanying 
exhibit or enclosure should be copied unless the enclosures 
(invoices), for example, are of such a nature as to suggest that 
they be copied in a special press copy-book. In one book or 
another, all of our communications should be copied (preferably 
press-copied, as then we have a facsimile copy) before they are 
delivered. 

Carbon copies, instead of press copies, can be used to advan- 
tage, but then the greatest possible care should be exercised to 



ACCOUNTANCY 187 

prevent the mislaying of these important papers. By the use of 
such loose copies, a complete file can be kept together of each 
transaction. 

There are other record and statistical bdoks, which will differ 
in function and form according to the business for which they 
are designed. 

Under this last head might be included the contract record of 
a contractor in which should appear first a memorandum of the 
chief features of the contract and a specific reference to the book 
in which the full text of the contract is recorded. Then should 
be entered in detail all the items included in the contract, and 
there should be appropriate columns in which to record against 
each item the date when ordered, when shipped, when received as 
shown by the actual acknowledgment of receipt, the cost, includ- 
ing freight and cartage, etc., and finally the total cost of each item. 
In passing, let me point out that such a record is of inestimable 
value to the contractor provided it is conscientiously kept up and 
finally made to agree with the record as found in the regular 
books of account; that is, with the total cost as disclosed by the 
treasurer's books. Such a contract record affords the opportunity 
to check up estimates of cost with the itemized records of cost in 
the case of completed contracts, and it also continually reminds 
us of the wisdom of tabulating in advance all the items required 
in a certain contract instead of waiting for a reminder in the 
form of a notice that the work of construction is stopped or 
delayed because some little, perhaps inexpensive, part has been 
forgotten. 

There are many other suqh special records, the need for which 
is suggested by the varying requirements of different lines of 
business, such as the meter records of a gas company, the policy 
record of an insurance company, the car record of a railroad 
company, the time record of any industrial concern, record of 
bills payable, record of bills receivable, etc. 

All these books so far mentioned we may roughly include in 
one class as subsidiary, auxiliary, and statistical books. 

We now come to a consideration of the books included in the 
other class — the general or principal books of account. 



188 LECTURE NOTES 

These include, according to certain authorities, some books 
which, by other authorities, would be described as subsidiary, 
auxihary, or statistical books. 

For the sake of simplicity, w^e can say that these general books 
of account are the 

Cash-Book. 

Journal. 

Ledger. 

Some authorities will claim that the cash-book is a portion of 
the ledger set apart from the other accounts because this account 
has to be kept in greater detail and hence can be kept more con- 
veniently in a book of different design from that adapted to the 
adequate keeping of the other ledger accounts. Others will claim 
that the cash account is so set apart because cash transactions 
should be recorded at once, whereas all other entries can be 
posted from the journal and cash account when most convenient; 
for having completed the chronological record and having kept 
up the cash record ready for instant reference, the full ledger 
record, if need he, can be completed later. I can supply another 
reason; namely, that as it is desirable to have the ledger records 
in compact form, if the details of cash account were included 
within the compass of the ledger binding, we should have either 
a very bulky volume or be obliged to transfer frequently all of 
the accounts to a new ledger because the space taken to record 
the many cash transactions item by item had filled all the spare 
leaves ; whereas by keeping cash account in a book by itself that 
part of the ledger only has to be renewed often. 

Still another reason, and a very practical one, which applies 
to this case and many others in the management of large under- 
takings, is that as the work has to be divided up between many 
clerks and bookkeepers, there must be the necessary multiplica- 
tion of books that all may work at the same time. As an example, 
where large amounts of cash are being taken in within a limited 
time and in small individual payments, requiring the employment 
of a number of receiving clerks, a corresponding number of cash 



ACCOUNTANCY 189 

receipts books have to be employed to supplement the regular 
cash-book in which the complete cash record is finally condensed. 

But, reason as we may, it is found desirable to have a separate 
book or books, in which to record fully in chronological order all 
transactions in which cash has changed hands. 

I prefer to treat the cash-book as a separate book and then 
to summarize in the ledger proper, under the heading "Cash 
Account," all the transactions which are given in detail in the 
cash-book. 

This is done by "posting" from the credit (or creditor) side 
of the cash-book the total footings in one amount to the credit 
side of cash account in the ledger, and the total footings of the 
debit (or debtor) side of the cash-book to the debit side of cash 
account in the ledger. This posting of the cash-book footings 
need only be done once a month. 

This makes the ledger complete in itself, and a balance can be 
struck by taking off the balances of all the accounts in the ledger 
without having to refer to another book — the cash-book — to 
obtain the balance of cash account to include with the other 
ledger accounts. 

As this requires only the additional posting from the cash-book 
to the ledger of two more items per month — namely, the total 
debit footing and the total credit footing — consuming say 
one half a minute a month or six minutes a year, I can find no 
valid argument to oppose to the course I here recommend. 

Here you see at once, we are discussing variations in the 
methods employed to put in practice the same principles. There- 
fore we are considering a question of convenience and not a 
vital point, and so authorities can disagree safely. 

The journal is a book in which all transactions not involving 
cash are recorded in chronological order with regard to both sides 
of the transaction ; such explanation is included as will make the 
entry itself completely self-explanatory or will furnish such defi- 
nite references to other books of record, naming the hook and 
page, as will furnish a completely self-explanatory record of the 
entries carried ("posted") from the journal into the ledger. 

Some authorities would amend this statement by saying: "The 



190 LECTURE NOTES 

journal is a book in which all transactions are recorded/' etc. 
That is, some claim that all transactions should be journalized, 
including all cash items which are completely explained in the 
chronological record contained in the cash-book. 

I prefer to use the journal for such primary entries only as 
are not set out in the cash-book. 

The ledger is the book in which all the entries covering all 
transactions are stored up finally in condensed form for future 
reference. It is the book in which all the original entries gathered 
from the cash-book and the journal, as later to be explained, are 
entered under their respective account-titles and in the proper 
columns ; viz., debtor or creditor. 

The process of carrying into the ledger, under the appropriate 
headings or accounts, the items as recorded in the books of pri- 
mary record, is called ''posting." 

The ledger, therefore, shows the final summing up of all busi- 
ness transactions and to it we refer to learn the debtor or creditor 
balance of any account, personal or impersonal. 

Those of you who have had some experience in bookkeeping 
may be ready to ask why I have not included in my list of prin- 
cipal books of account, the day-book, sales-book, invoice-book, 
petty cash-book, etc. 

The day-book is intended to receive in chronological order the 
primary record of all transactions, including purchases and sales. 
Where the transactions are so numerous as to call for it as a 
matter of convenience, the sales are recorded in a separate sales- 
book (or books), and the purchases are recorded in a separate 
invoice-book (or books). 

But as far as the character of the entry is concerned, all of this 
can be done in the journal, and hence these books can be con- 
sidered as sections of the journal. 

The petty cash-book is a book in which, for greater con- 
venience, the small cash payments are recorded in chronological 
order, and are carried later into the general cash-book in one 
entry, say at the end of each month. The petty cash-book should 
be used only for the recording of petty cash expenditures, as its 
name implies. The items should be classified carefully before 



ACCOUNTANCY 



191 



transfer to the cash-book proper and a voucher should be filled out 
and filed with the other cash vouchers. The practice I recom- 
mend is to draw such an amount from cash as we think will be 
sufficient for the month, allowing a reasonable margin, and charge 
this amount to petty cash on the regular cash-book. At the end 
of the month, classify the payments to the accounts responsible 
and charge in cash-book to those accounts, paying back the 
amount so charged to petty cash. As at the end of each month 
petty cash is repaid for the amounts paid out during the month, it 
remains charged or debited only with the amount originally ad- 
vanced, while the payments as made now appear in the regular 
cash-book, though in condensed form. 

So the principal books of account reduce to the cash-book, 
the journal and the ledger; and according to many English 
authorities the cash-book is merged in the ledger; so then we 
have only the journal and ledger. 

I will now show a journal, a cash-book and a ledger in their 
simplest forms and include a few simple entries to show how 
these books work together. ' 

JOURNAL 











Dr. 






Cr. 




19 


04 
















Nov. 


15 


Merchandise, Dr. 

to John. Smith. 
100 bbls. flour $4.50. 


6 
14 


450 


00 




450 


00 




17 


Henry Herbert, Dr. 

to Merchandise 
100 bbls. flour $5. 


25 
6 


500 


00 




500 


00 



The Dr. and Cr. items are on the one page and the pages are numbered consecu- 
tively. 



In a business of any magnitude, such purchase and sales items 
would probably be recorded in separate appropriate books, and 
later condensed with many other like items and so carried into 
the journal for posting into the ledger. There is considerable 
variation in the practice, but the above entries serve my present 
purpose, and especially in pointing out the difference between the 
journal and the cash-book as to posting from them to the ledger. 



192 



LECTURE NOTES 



CASH-BOOK 



Dr. 



Dec. 



To Henry Herbert. 



100 bbls. flour. 



500 



00 



Cr. 



19 


04 














Dec. 


10 


By John. Smith. 
" Expense acct. 


100 bbls. flour. 


14 




450 


00 




16 


Webster & Co., 














. 


stationery. 


3 




16 


50 



The above represents two pages— the Dr. items are on the left page and the Cr. 
items on the right page. The pages are numbered 1 and 1, 2 and 2, 3 and 3, etc. 

This because it requires two pages to cover the same date and the pages are num- 
bered accordingly. 



Dr. 



LEDGER 

Cash Account 



1 
Cr. 



19 


04 












19 


04 












Dec. 


12 




2 




500 


00 


Dec. 


10 
16 




2 




450 
16 


00 
50 



Dr. 



Expense Account 



Cr. 



19 
Dec. 



To cash. 



2 




16 


50 







ACCOUNTANCY 



193 



Dr. 






MERCHANDISE ACCOUNT 






6 
Cr. 




19 
Nov. 


04 
15 


To Journal. 


1 




450 


00 


>9 

Nov. 


04 
17 


By Journal. 


1 




500 


00 


Dr. 


John Smith 


14 
Cr. 


19 
Dec. 


04 
10 


To cash. 


2 




450 


00 


19 

Nov. 


04 
15 


By Journal. 


1 




450 


00 


Dr. 


Henry Herbert 


25 
Cr. 


19 
Nov. 


04 
17 


To Journal. 


1 




500 


00 


19 
Dec. 


04 
12 


By cash. 


2 




500 


00 



The Dr. and Cr. items of the same account are on the one page. The numbers 1, 3, 
6, 14 and 25 are pages in Ledger. 



In the journal the entries are made in chronological order. 
The debit and credit items are shown on the same page. In 
the form shown, the two columns for debit and credit are side 
by side at the right of the page, the debit column, however, to 
the left of the credit column, thus conforming to the arbitrary 
rule that debit items shall go to the left and credit items to the 
right. The titles of the accounts and the complete explanation 
of the entry appear in the main space in the center, the date in 
the column at the left, the amount in both the debit and credit 
dollars-and-cents columns. 

In the cash-book the entries are made in chronological order, 
the debit items on the left page and the credit items on the 



194 LECTURE NOTES 

opposite page to the right. Two pages are required for the same 
date. Items of the same date must be kept on opposite pages, and 
where the debit and credit items are not equal in number, the 
lower horizontal lines of one or the other side are left blank, a line 
being drawn diagonally up and across the blank portion of the 
page to indicate that it is not to be occupied. At the left of each 
page are the columns for the date, month, and day. Next are the 
two broad columns for the descriptive matter, the first for the 
title of account and the next for explanation. If the account is an 
impersonal one, such as "Expense," then the first of these two 
columns is occupied by the title of the account and the next column 
contains the name of the party paying or receiving the cash. In the 
column between the descriptive matter and the columns for dollars 
and cents are placed the numbers of the pages in the ledger con- 
taining the accounts to which the cash items have been posted. 
For instance, Henry Herbert's account is shown as occupying 
page 25 of the ledger. The dollars and cents are entered in the 
columns at the right of each page, debit on the left page and 
credit on the right page. 

In the ledger the entries are in chronological order as far as 
each account is concerned, but the several accounts are placed in 
the book as found to be most convenient. The entries are 
"posted" from the primary records into the ledger under the title 
of the account involved. Here the debit and credit items are 
on a single page, but, unlike the journal, the page is divided 
vertically through the center, the left half being devoted to the 
debit items and the right half to the credit items. 

These books, particularly the cash-book and the journal, are 
ruled in different ways to meet the special wants of the business 
concerned or the individual opinions of the bookkeeper or 
accountant in charge. For instance, in the journal sometimes the 
debit dollars-and-cents columns are on the left side of the page, 
the credit columns on the right side and the space reserved for 
descriptive matter is in the center. 

Again, cash and other books are frequently ruled with extra 
dollars-and-cents columns to receive the entries for certain 
accounts only, leaving the one column as before for miscellaneous 



ACCOUNTANCY 195 

items. For instance, there might be on each side of the cash- 
book an extra dollars-and-cents column for merchandise account, 
for the reason that a large part of all the entries passing through 
the cash-book were on account of merchandise. Then these extra 
columns would be headed "Merchandise Account" and the other 
columns "General" or "Miscellaneous." Then the total footings 
of the merchandise columns could be carried into the general 
ledger in one debit item and one credit item at the end of the 
month, making a saving in labor, more or less important accord- 
ing to the volume of business involved; and so the cash-book 
could be ruled for a number of accounts in which the entries 
were most numerous. No matter how this ruling may be varied, 
no matter whether one page or two pages are required for the 
debit and credit items, the arbitrary rule holds good that the 
credit column is always to the right of the debit column. 

Coming back to the examples I have given, let us trace the 
entries through the several books. 

In the journal is recorded first the purchase and receipt from 
John Smith of 100 barrels of flour. We charge or debit 
the impersonal or speculative account, merchandise, with $450, 
because it has received the flour, and we credit John Smith with 
a like amount because he has given the flour to our merchandise 
account. 

Then we record the sale of 100 barrels of flour to Henry Her- 
bert at $5.00 per barrel. This time "Merchandise" gives up the 
flour to Herbert, so we debit Herbert's account and credit mer- 
chandise account with $500. Through merchandise account we 
wish to keep track of the losses and gains from the purchase 
and sale of merchandise; so for all merchandise purchased we 
debit the account and for all merchandise sold we credit the 
account. If all the merchandise bought had been sold, then if 
the total of the credit items in merchandise account in our 
ledger exceeds the total of the debit items, the difference or 
"balance" would be our gross profit on all the transactions in- 
volved. But if there were merchandise still unsold, the merchan- 
dise in stock must be added at cost prices to the total of the 
credit items, and the balance is gross profit, subject however, 



196 LECTURE NOTES 

to any loss that may occur in selling the remaining merchandise 
at prices lower than the purchase prices. Such possible deprecia- 
tion in all merchandise and all assets must be taken into account 
in calculating profit and loss. Following the same process, if the 
debit total exceeds the credit total, it is shown that the trading has 
resulted in a loss. 

Coming now to the cash-book, on December 10 we pay Smith 
for the flour received from him, so we credit cash with having 
paid out this money, and this entry also indicates a debit to Smith. 

On December 12 Herbert pays us for the 100 barrels of flour 
sold to him. This $500 is debited to cash because cash receives 
the money, and by implication this debit entry to cash makes a 
credit entry to Herbert. 

On December 16 we pay out $16.50 for stationery and we debit 
this to expense account, to which account we expect to charge mis- 
cellaneous items of expense during the year; so we have at the 
end of the year a summary of the cost of all the expense items 
included in this account according to our predetermined classi- 
fication. 

Now coming to the ledger : 

We "post" the entries from the journal and the cash-book into 
the proper accounts in the ledger. 

As I have explained already, the entries in the journal are com- 
plete. That is, the debit and the credit side of each transaction is 
shown ; each amount is shown twice, once in the debit column and 
once in the credit column. So in posting into the ledger we post 
from the debit column of the journal into the debit column of the 
proper account in the ledger, and from the credit column of the 
journal into the credit column of the proper account in the ledger. 

But when we post from the cash-book into the ledger we have 
to remember that what is to the debit of cash is to the credit of 
Herbert ; and that the first item to credit of cash is to the debit of 
Smith and the second item is to the debit of expense account. 

So in posting these items from cash-book into ledger we post 
from the left or debit side of cash to the right or credit side of 
the ledger ; and from the right or credit side of cash to the left or 
debit side of the ledger. 



ACCOUNTANCY 



197 



Then, if we summarize in the ledger the cash account as shown 
in detail in the cash-book, as I have recommended, at the end of the 
month we post the total debit footings of cash-book into cash 
account in the ledger on the debit side, and the total credit footings 
of cash-book into the cash account in ledger on the credit side. 
There is no reversal in the posting in this case, because cash 
account in the ledger is simply a condensed form of cash account 
as shown in the cash-book. 

If, according to the older practice, a practice still maintained by- 
some, we journalize all cash items, the entries I have shown in the 
cash-book would be as follows: 

JOURNAL 



1904. 






Dr. 






Cr. 




Dec. 


10 


Jno. Smith, Dr. 

to Cash. 
Payment in full for 100 bbls flour. 




450 


00 




450 


00 




12 


Cash, Dr. 

to Henry Herbert. 
Received in full for 100 bbls. flour. 




500 


00 




500 


00 




16 


Expense acct., Dr. 
to Cash. 
P'd to Webster & Co. for bill of stationery 




16 


50 




16 


50 



In this case both sides of each transaction are shown. In the 
case of the first entry, we not only show the debit of $450 to 
Smith, but we show just as explicitly the credit of $450 to cash. 
As the entry is made as a basis for recording two sides of the 
transaction under the proper headings in the ledger, it is apparent 
that we must post these entries, debit and credit, into the ledger as 
they are shown in the journal. 

But now if we omit the journalizing of cash, and enter each 
transaction at once in cash account in the cash-book, we must 
remember that that entry only records one side of the transaction 
and we must post the entry into the ledger in the account involved 
on the other side of this cash transaction. 

So in the case of the John Smith entry as first shown in the 
cash-book, we must post that cash credit entry as a debit entry in 
the John Smith account, just as much as if both sides of the 



198 LECTURE NOTES 

transaction had been shown as in the corresponding journal 
entry. 

If these entries as made in the cash-book and the journal are 
compared, and it is borne in mind that these entries record exactly 
the same transactions, there should be no longer any trouble in 
understanding why we reverse in posting from the cash-book to 
the ledger and do not reverse in posting from the journal. 
Remember I have introduced this example of journalizing cash 
only to illustrate this difference in posting and not to indicate 
that cash items should he journalized. 

In the journal I have written the entries thus : 

John Smith, Dr., $450.00 

To Cash, $450.00 

This would be just as correct and self-explanatory to a book- 
keeper if written: 

John Smith, $450.00 

Cash, $450.00 

"Dr." and ''to" can be omitted safely because the debit and 
credit columns fully indicate that Smith's account is debited and 
cash account is credited. 

Also in the cash-book and ledger on the debit side I have made 
the entries: 

To Henry Herbert, To Cash, and To Journal : 

and on the credit side : 
By John Smith, By Expense Account, By Journal, and By Cash. 

In the John Smith account ''to cash" signifies that so far as 
that one transaction is concerned, John Smith is debtor to cash 
account or the cashier for money paid by cash to John Smith. 

In the cash account this same transaction is recorded "By John 
Smith" — which signifies that cash account or the cashier is 
entitled to take credit "by" (or for) the amount paid to Smith. 

But this is all clearly shown without the use of the words "to" 



ACCOUNTANCY 199 

and ''by" if the double-entry system of bookkeeping is under- 
stood. 

Therefore, while this use of the words "to" and ''by" is in con- 
formity with bookkeeping traditions, it is not obligatory. 

The older practice in writing the headings for ledger accounts, 
still followed generally in Europe and less frequently here, is as 
follows : 

Dr. John Smith Contra Cr. 



signifying that entries on the left are to the debit of John Smith 
while those to the right are opposed or against these debits and 
therefore to his credit. 

The practice in the United States is becoming more and more 
general, to simply write over the center of the account, "John 
Smith," omitting as surplusage not only the word "contra," but 
also "Dr." and "Cr." 

It must now be fully apparent that for every debit item carried 
into the ledger there must be a like credit item; and for every 
credit item a like debit item. In this connection we must recollect 
that if we do not have a cash account in the ledger we must con- 
sider the cash-hook as part of the ledger. 

Considering the ledger accounts which I have shown, we find 
the following debit and credit balances : 

DR. CR. 

Expense Account, $16.50 

Merchandise Account, $50.00 

Cash Account, 33.50 



Showing the debits and credits in balance, $50.00 $50.00 

What is true in the case of these few simple entries would be 
true no matter how many and how complicated the entries were, 
provided the work was correctly performed. 



200 LECTURE NOTES 

It will be noticed that in this ledger balance I have taken no 
notice of Smith's account and Herbert's account because in each 
case the debit and credit items balance or cancel each other. 

Analysing the figures taken from the ledger, we find that by- 
trading in merchandise we have made a gross profit of $50, from 
which we must deduct $16.50 for expenses, leaving $33.50 net 
profit, and this net profit we find as cash in hand as shown by 
cash account. 

I have been asked by members of my classes what I meant by 
a debit balance or a credit balance. 

The fact that such a question was asked emphasizes the neces- 
sity for some instruction in accountancy, if only to enable the 
engineer to understand the language of business. It is not only 
necessary that the engineer should understand this language as 
correctly used, but certainly he should know that there are many 
variations in the language of accountancy. Unfortunately there 
is not a little confusion caused by non-uniformity in accountancy 
terminology and especially so in the United States. This is most 
unfortunate at this particular time when the writers for our 
papers and magazines frequently attempt to instruct the public 
without a sufficient knowledge of the exact meaning of the terms 
employed. The fault sometimes rests with the accountants and 
bookkeepers who are careless with regard to the meanings of 
such terms as earnings, net earnings, profits, net profits, surplus, 
etc. The public has of late frequently been misled and deliber- 
ately deceived by the incorrect use of such terms. Our legisla- 
tures and our courts have added to the confusion by failing, as 
an example, to make the proper distinction between such terms 
as income, receipts, earnings, profits — gross and net. When in 
doubt yourself, or when you think there may be any question on 
the part of those you are addressing, you should explain the 
meaning of the terms used. As to the meaning of the terms 
now to be explained there can be no question. 

A debtor, or debit, balance is the amount by which the debit 
side of an account exceeds the credit side. 

A creditor, or credit, balance is the amount by which the credit 
side of an account exceeds the debit side. 



ACCOUNTANCY 201 

A question recently asked and many similar experiences indi- 
cate that the relation of cash to the business in which cash is con- 
cerned is at times puzzling. 

Let us consider for the moment that the owner does nothing 
for himself and consequently assume that when a person pays in 
a sum of money to the owner's business it is not he (the owner) 
who receives it, but his cashier or his cash account that receives 
it for him and is accordingly his debtor for the amount received. 
The cashier has received the money on behalf of his employer and 
therefore is liable for it and must subsequently account for it. 
Until he so accounts he is a debtor for the amount so received. 

If, then, the cashier is made debtor for each amount which he 
receives on behalf of his employer, we must make him as far as 
any one transaction is concerned the employer's creditor when he 
pays out money on behalf of the employer. 

If we balance up between the debit items and the credit items 
we may find that the cashier is still debtor for a balance of cash 
on hand; but, nevertheless, he has been made creditor for each 
item of cash paid out ; and it is by balancing up, or placing against 
each other, the debit and credit items that we learn the final 
result as to whether there is a debit or a credit balance. If there 
is a debit balance of cash it indicates that the cashier being 
debtor, there is a balance of cash in his hands for account of the 
owner. If there is a credit balance to cash account, it indicates 
that there is a deficit — there is no cash on hand, but there is 
money owing to the cashier. 

Again, suppose you are your own cashier, and suppose you 
pay cash to a person from whom you have purchased merchan- 
dise. You became his debtor when you received his merchandise, 
and he became your creditor. When you paid him in cash for the 
merchandise, by that transaction, considered by itself, you became 
his creditor and he became your debtor. The one who receives 
is always the debtor and the one who gives is always the creditor, 
and this whether the thing given and received is merchandise, 
services, real estate, cash, or any other kind of property. Only 
in case of cash transfer does the entry appear in the cash-book, 



202 LECTURE NOTES 

and then the entry is made with respect to the owner of the cash- 
book. 

This relationship of cash to the business should be turned over 
in the mind and viewed from different standpoints, and especially 
you should get into the habit of looking at the transactions as 
shown on the books of account from the standpoint of the out- 
sider ; that is, you should develop the capacity of correctly inter- 
preting a statement of account whether you look at it from the 
standpoint of the proprietor or the standpoint of some one doing 
business with the proprietor; you should cultivate the capacity 
for seeing both sides of every transaction. 

While speaking of cash, let me give another hint which fre- 
quently appears to be needed. Do not assume that because a 
profit has been secured by a certain transaction or a number of 
transactions, that this profit can be found in the form of cash; 
it may be in some other form of asset. 



ACCOUNTANCY 

Classification of Transactions and Grouping of Accounts 

I have shown already in an elementary way the classifying of 
certain transactions by the assigning of each transaction to some 
predetermined account. These accounts are permanently estab- 
lished in the ledger. The title of each account is written at the 
head of the page or pages assigned to it, and is entered also in an 
alphabetical index. 

A simple rule, neglected too often, is to assign to each account, 
as far as possible, a title which shall be self-explanatory. 

In a business of any magnitude, the scheme of classification is 
of prime importance ; it should be planned broadly and in detail 
to meet all the legal and commercial requirements of the business. 
This means that the classification should give full opportunities 
for the analysis of all branches of the business, and therefore, the 
planning should be the work of a thoroughly competent account- 
ant assisted by the specialists in charge of the several branches of 
the business. 

The schemes of classification, as employed by our large public 
utility and industrial corporations, are generally the result of 
experience. As the business has developed and new needs have 
become apparent, the system of accounting, including the classi- 
fication, has been developed more or less completely to meet the 
enlarged requirements. In this country, great progress has been 
made in this direction in late years. 

The present more usual practice is to establish certain general 
accounts which serve to classify the transactions broadly, and 
then to subdivide these general accounts under such subordinate 
headings as may be required for the purposes of more complete 
analysis. It must not be forgotten that efficient and economical 
management in great measure depends upon the means provided 
by the accountant for the complete and accurate analysis of oper- 
ating results. Here the danger of system degenerating into red 
tape must be guarded against constantly. 



204 LECTURE NOTES 

In the endeavor to provide the means for closely detailed 
analysis of the affairs of a large concern, and more especially 
where the business is divided up into many subordinate com- 
panies, the system of classification becomes so extended that every 
possible provision must be made for ready reference and for 
uniform practice in the application of the system. 

Frequently, besides the title, the account is identified by a 
numeral, or letter, or both. A practice which is now quite usual 
is to indicate for reference the general accounts by the letters 
of the alphabet and the subdivision of these accounts by nu- 
merals. For instance, if we have a general account called manu- 
facturing, and to that we assign the letter A, we might have 
many sub-accounts to cover the subdivisions of the cost of manu- 
facturing. Suppose manufacturing labor was the seventh sub- 
account, then it would be indicated by A- 7. 

Such an elaborate system of classification should be fully set 
forth and explained in a book especially designed for the purpose. 
A page should be devoted to the description of each account. On 
this page should appear, first, the title of the account with its letter 
and number; then a general statement of the scope and purpose 
of the account ; then a schedule of all the items to be carried into 
the account; then, if need be, the special journal entries involved, 
and accompanying explanations; and finally general explanatory 
notes. Thus the best has been done to enable a competent book- 
keeper to put the scheme into effect. There should also be an 
index of all items of expenditure, referring by page to the 
accounts under which they are scheduled. 

Some accountants do not favor so much detail in connection 
with the classification book. My experience goes to show, even 
with the fullest explanation that we can give, that it is at times 
difficult for a competent bookkeeper to decide questions of classi- 
fication; if, then, we are looking for uniform results, we must 
afford every possible assistance to the bookkeeper and to those 
upon whom he depends for primary data. To ensure uniformity 
in the application of an extended scheme of classification, the 
memory alone should not be relied upon for any essential feature 
of the scheme. 



ACCOUNTANCY 205 

I am also strongly in favor of including in the classification 
book the forms for the regular monthly journal entries, and also 
a full statement of the rules for closing the books at the end of 
the fiscal period, accompanied by the forms to be used in making 
the adjusting and closing journal entries. 

A method which I followed in developing a uniform system of 
accounts used in the management of a large number of subordi- 
nate companies operated by a controlling company — the first 
system of that kind developed for the particular business in- 
volved, and one of the first uniform systems established in this 
country — was always to have before me, when approving 
vouchers, the classification record. Whenever a decision had to 
be made, as to how a certain item should be classified, whether it 
was an original decision or correcting some rule already made, the 
entry was made at once upon my own copy of the classification 
record, and, at short intervals, these corrections were manifolded 
and sent out to all the subordinate offices, and at longer intervals 
complete copies of the revised classification record were so dis- 
tributed. 

Any of you who may become responsible for the planning of 
a scheme of classification for some new line of business may find 
it advisable to follow this course rather than to attempt to devise 
a completely comprehensive scheme in advance of actual experi- 
ence. 

There is the utmost necessity for utilizing all available knowl- 
edge and experience in the planning of an adequate scheme of 
classification. But we must not fall into the error which so often 
operates to disqualify comparative data furnished by govern- 
mental bodies and others ; namely, in assuming that because cer- 
tain rules are laid down to cover the making of records, that 
necessarily those rules have been followed. In the operation of 
a single company it is difficult to follow the scheme of classifica- 
tion with such uniformity as to give figures absolutely reliable 
for purposes of comparison. If we are comparing the operating 
data from a number of corporations employing the same scheme 
of classification, the difficulties of securing accurate comparisons 
are correspondingly multiplied. So, then, to secure from a 



206 LECTURE NOTES 

uniform system of accounting as applied to the operation of a 
number of corporations the data for reliable comparisons, two 
difficult propositions must be solved : 

First, the planning of a scheme of classification which shall 
furnish the means for analysing the results obtained by all 
branches of the business. 

Second, the strict compliance with the rules of classification on 
the part of all who in any way contribute to the classifying of 
transactions in all the companies involved in the comparison. 

This means that it is practically impossible to secure such com- 
parative data of absolute reliability, though they can be secured 
of sufficient reliability for the comparisons to be of great practical 
value. 

Many bookkeepers and some accountants will not agree with 
me in the opinions thus expressed as to the difficulty of securing 
accounting data that can be accepted blindly for comparisons. I 
can say that my opinion is based upon a wide experience in the 
management of many companies operating under a uniform 
system of classification and accounting, the operations of the com- 
ponent companies being checked constantly by expert auditors and 
engineer inspectors, and all striving to secure the result aimed for ; 
namely, completely reliable comparisons. One difficulty which 
many fail to provide for adequately, is having to rely in many 
cases upon indifferent and ignorant minor employees for the 
primary information upon which certain expenditures are classi- 
fied. A mistake here means a mistake at the very foundation of 
the scheme. 

Let the warning here sounded also serve as a caution against a 
blind acceptance of tables of data published by branches of the 
government, official bodies, and especially reform associations. 
Frequently these data which are offered for comparison are the 
tabulation of figures furnished by many people competent and 
incompetent, all presumed to have made an intelligent effort to 
interpret directions furnished to secure uniform returns, these 
directions, however, being probably incomplete and ambiguous, 
and so subject to many variations in the interpretation. Many 



ACCOUNTANCY 207 

have been misled and many have succeeded in misleading by this 
kind of ''comparative data." 

Undoubtedly some of the schemes of classification which have 
been developed of late for the control of public utility corpora- 
tions, especially by certain of the State Public Service Commis- 
sions, are unnecessarily intricate and subdivided in some parts 
and not sufficiently subdivided in other parts. I think we may 
safely assume that in some cases the members of the commissions 
and some of their employees could not pass an examination on 
the scheme of accounting which the corporations under their 
control are required to accept and employ. Where there is an 
honest desire on the part of the commission to assist rather than 
hamper and obstruct the companies under their control, the co- 
operation thus developed will bring about systems which will 
serve at once the needs of the corporations and the interests of 
the public. 

I by no means contend, however, that the simplest system is the 
one containing the least number of accounts. While a condensa- 
tion of accounts may lessen the actual labor in the bookkeeping 
department, it may likewise add to the labors of the conscientious 
manager, as such a scheme of classification affords him insufficient 
opportunity to analyze effectively his operating costs and to make 
the required comparisons of his own results between periods and 
with the results of other companies in the same line of business. 
The manager so handicapped can make the complete analyses and 
comparisons only by laboriously subdividing these condensed 
book accounts, as occasion demands, at the expense of his valu- 
able time and energy which could be spent better in some other 
way. 

It sometimes happens that, under the same general manage- 
ment, provision may well be made for two schemes of classifica- 
tion, one less subdivided than the other. The senior or more com- 
plete scheme, for the larger companies, and the junior, or more 
condensed scheme, for the smaller companies. 

In the general scheme of classification developed by a committee 
of the American Gas Light Association, the intention was to 
provide for any and all of the gas companies of the United States, 



208 LECTURE NOTES 

large and small. The plan provided a senior and a junior classi- 
fication. In both schemes the same general accounts were adopted 
to cover broadly the same classes of items, but in the junior 
scheme these general accounts did not include so many sub- 
accounts as in the senior scheme. By this plan comparisons could 
be made between the operating results of the larger and smaller 
companies as to the larger divisions of cost items, but when it 
came to the more complete subdivision of the items of cost the 
junior system failed to afiford means for ready comparison. 

Among accountants there is much difference of opinion as to 
the grouping of accounts. To my mind, much of what has been 
written on this subject is more academic than practical. 

One of the divisions that can be found in some of the English 
text-books is as follows : 

Real Accounts. Dealing with actual property. 

Personal Accounts. Showing the record of transactions be- 
tween the owner and the various persons with whom he has busi- 
ness transactions. 

Nominal Accounts. Dealing with various forms of income 
and expenditures. 

Another division recommended is Personal, Real and Imagin- 
ary Accounts. The first two cover the same ground as shown 
above, and the last takes account of stock and expense accounts. 

Another division is as follows : 

Speculative Accounts. Having to do with merchandise, real 
estate, interest, expense, etc. 

Non- Speculative Accounts Having to do with items from 
which neither loss nor gain is to be directly expected, such as 
cash, bills payable, bills receivable, personal accounts, etc. As an 
example of the modifications that may be introduced here a loss 
may be developed by bills receivable not being received at their 
full face value. 

Another division is Personal and Impersonal Accounts : 
Personal Accounts. As above explained, the accounts with 
individuals, firms, and companies with which we do business. 



I 



ACCOUNTANCY 209 

In connection with these accounts, we must in making our entries 
always consider the other party to the account. 

Impersonal Accounts. As merchandise, expenses, repairs, 
wages, salaries, etc., varying with the scheme of classification. 
Here we have to consider only the several relationships between 
the different features of our own business. In the case of per- 
sonal accounts, the journal cross entries, in which one account 
is debited and another account is credited, cannot be made without 
taking into account the rights of both parties to the transaction. 
In the case of impersonal accounts, such cross entries can be 
made without doing injustice to anyone except the proprietor of 
the business, though of course the result might be to falsify the 
accounts. 

As I have said, the differences of opinion as to these group- 
ings of accounts is more academic than practical. 

There is one practical advantage, however, in considering these 
different groupings or divisions of accounts — it brings one to 
consider the principles of accountancy from several points of 
view. The main thing is to bear in mind continually that, no 
matter what the name of the account, we must discriminate most 
carefully in the treatment of our accounts with respect to assets 
and liabilities, and with respect to items of income and expense. 
This point I shall emphasize in connection with our study of 
depreciation. If depreciation is not provided for from earnings, — 
and I am referring to depreciation of plant, depreciation of manu- 
factured stock, depreciation of stock in course of manufacture 
or raw material to be manufactured into stock — we are depleting 
our assets and so drawing upon our capital. 

In this connection I shall state a rule which is the only rule I 
shall require you to memorize. As we proceed in our work I 
shall expect you to test this rule by the application of principles, 
and especially when we come to the analysis of the ledger trial 
balance and the ledger balance sheet. 

1. An item on the left or debit side of the ledger (a) is an 
asset if the amount eventually will be received; (b) is a loss if the 
amount eventually will not be received. 



210 LECTURE NOTES 

2. An item on the right or credit side of the ledger (a) is a 
liability if the amount will eventually have to be paid; (b) is a 
gain if the amount will eventually not have to be paid. 

I am not an advocate of placing dependence upon memorized 
rules, but I make an exception here because the rule is far more 
suggestive of the principles involved than is ordinarily the case. 

Let me amplify somewhat. If we have paid out money and it is 
to be returned to us, say, by the sale of the thing in which the 
money has been invested, then the balance to the debit of the 
account involved represents an asset. 

If, on the other hand, we have paid out money which is not to 
be returned to us, then the balance to the debit of the account 
involved must be considered as a loss. 

If money has been paid to us, and we have to pay it back, then 
the balance to the credit of the account involved represents a 
liability. 

If, on the other hand, we have received money which we do not 
have to pay back, then the balance to the credit of the account 
involved represents a gain. As will be seen later, our expectations 
may not be realized and so an asset may be transformed into a 
loss. 

To the student of accountancy it is at first a stumbling-block to 
find that losses and assets are grouped together as debit balances, 
and that gains and liabilities are grouped together as credit 
balances. The accounts thus grouped together appear to be in 
direct opposition to each other and therefore a contradiction 
seems to be involved. A study of this rule shows at once that 
this is not an arbitrary arrangement, but that it is in accordance 
with principle. All money paid out goes to the debit of some 
account necessarily. Whether it is to be an asset or a loss 
depends upon whether the money so paid out is represented by 
property acquired or not. In the same way on the other side, if 
we receive money we must give credit to some account, and 
whether this is to be considered as a gain or a liability depends 
upon whether we have to pay back that money or not. 

This goes to emphasize what I have already said as to the 



ACCOUNTANCY 211 

necessity of discriminating most carefully in classifying trans- 
actions between asset and liability accounts, on one hand, and 
income and expense accounts, on the other hand. In the first 
group we have represented in the liabiHties the capital perma- 
nently or temporarily invested in the business ; and in the assets 
we have represented the way in which that capital has been 
invested. In the loss and gain accounts, during each fiscal period, 
we follow all the items of income and expense through the 
various channels in which the capital is employed in the effort to 
make a profit and increase our assets. 

Although I shall refer to the subject more fully later on, it is 
convenient here to refer briefly to the trial balance and balance 
sheet, and the difference between the two. 

At any time and especially at the end of any fiscal period we 
must go to our ledger to determine what has been the financial 
gain or loss as the result of our operations to date. Supposing 
that all entries from the cash-book and the journal have been 
posted in the ledger, we shall find in that book all the asset and 
liability accounts and all the loss and gain accounts which are still 
open. The balances of the asset and liability accounts will be 
found as they were at the beginning of the fiscal period, increased 
or decreased by the transactions of the period. The balances of 
loss and gain accounts will represent all and only the income and 
expense items involved in the transactions of the period. 

The first thing required is to see if the ledger is in balance ; 
that is, if the sum of all the debit balances equals the sum of all 
the credit balances. To this end each open account is footed up 
in pencil on the debit and the credit sides. If the footings are the 
same, or balance, the account is closed for the time being. If 
the footing on one side is greater than on the other side, the 
''balance" is found by deducting the lesser amount from the 
greater. The balance so found is written in pencil on the side on 
which the balance is found and also written on a sheet of paper 
ruled for debit and credit items. Having thus footed up all the 
open accounts and entered the balances as found upon the trial 
balance sheet, all the debit and all the credit balances are footed. 
If the column containing the debit balances totals the same as 



212 LECTURE NOTES 

the column containing the credit balances, we assume that the 
ledger is correct. If these totals are not the same, the next thing 
to be done is to find the error or errors and make the necessary 
corrections. No matter how small the difference, a balance 
should not be "forced." Some accountants and bookkeepers 
favor the practice of placing on the trial balance and ledger 
balance sheets the debit and credit footings of each open account 
in addition to the balance. 

With the trial balance before us, we study all the balances to 
see if any adjustments need to be made between the several 
accounts. For instance, if we have an account to show what has 
been invested in office furniture and fixtures, we may feel sure 
that this asset has lost part of its value during the year by reason 
of depreciation. We must then estimate the amount of this 
depreciation and treat that amount as one of the losses of the 
year. But as this loss is not represented by the payment of cash, 
we must make an appropriate entry in the journal, charging or 
debiting this loss to some expense account, or direct to Loss and 
Gain account, as later to be described. But this entry must show 
a credit as well as a debit if our ledger is to be kept in balance, 
and also we must reduce the "book value" of office furniture and 
fixtures because its value as an asset has been decreased. So the 
amount of depreciation is also credited to Office Furniture and 
Fixtures Account. The journal entry then appears something 
Hke this: 

Loss and Gain Account, Dr., $500.00 

To Office Furniture and Fixtures Account, $500.00 

Depreciation on office furniture and fixtures for the year, esti- 
mated at 10 per cent on $5,000. 

This entry being posted in the ledger to the debit of Loss and 
Gain Account and the credit of Office Furniture and Fixtures 
Account, the proper adjustment has been effected as to this item 
of loss as estimated. 

There may be many other adjusting entries to be made in the 
journal before the Loss and Gain Account can be made up; for 
instance, certain accounts receivable may be found to be worth 
less than their face value; other items of depreciation may have 



ACCOUNTANCY 213 

to be accounted for ; the inventories of merchandise and material 
may fail to correspond with the balances of the involved accounts 
— then adjusting entries, fully self-explanatory in each case, must 
be made in the journal and posted into the ledger. 

When all adjusting entries have been made then all the loss 
accounts should be debited to Loss and Gain Account, and all the 
gain accounts should be credited to Loss and Gain Account, which 
condenses all the losses and all the gains in the one account and so 
enables us to strike a balance between the losses and gains and to 
determine whether the result of the year's operations has been to 
produce a profit or a loss, and the amount in either case. 

Again, these entries must in each case show a debit and a credit 
to keep the ledger in balance, by cancelling the individual balances 
when they are grouped in the Loss and Gain Account. 

The journal entry to close the losses into Loss and Gain 
Account might be as follows : 

Loss and Gain Account, Dr., $125,000.00 

To Sundry Accounts as below : 

Expense Account, $ 3,000.00 

Rent Account, 2,000.00 

Manufacturing Labor Account, 25,000.00 

Manufacturing Material Account, 50,000.00 

Taxes Account, 10,000.00 

Salaries, - 15,000.00 

Selling Expense, 20,000.00 

Then follows the explanation to show that this entry is made to 
close the books for the year (or fiscal period) ending, say, Decem- 
ber 31, 1910. 

Next comes the journal entry required to carry the gain items 

into the Loss and Gain Account, as follows: 

« 
Sundry Accounts as below, Dr. 

To Loss and Gain Account, $155,000.00 

Merchandise Sales Account, $150,000.00 

Interest Account, 5,000.00 

Then follows the explanation, which in every case must be 
complete. 



214 LECTURE NOTES 

Interest Account does not indicate by its title whether it is a 
loss or gain item. This depends upon whether we pay out more 
as interest on money borrowed or collect more as interest on 
money loaned. 

In both of these entries I fill in the amounts simply to illustrate 
that the total amount debited or credited to Loss and Gain 
Account must be the sum of the separate items in each case. 

Having posted these entries into the ledger, the Balance Sheet 
is made by taking off the balances of all accounts yet open on the 
ledger after completing this process of adjusting and closing all 
losses and gains into Loss and Gain account. 

If the posting of all adjusting and closing entries has been 
correctly performed, the debit and credit columns on the Balance 
Sheet will be found to foot up the same — that is, to balance. 

Thus we see that the Ledger Trial Balance gives the balances 
of all open accounts on the ledger before closing the books for any 
fiscal period, and the Ledger Balance Sheet gives the balances of 
all open accounts after all asset and liability accounts have been 
adjusted as may be necessary, and all losses and gains as shown 
by the several income and expense accounts have been concen- 
trated in the one Loss and Gain Account. 

Speaking generally, on a Balance Sheet there are only asset and 
liability items and the one balance to Loss and Gain Account, 
either debit, showing a loss, or credit, showing a profit. 

Now this balance, either to the debit or credit of Loss and Gain 
Account, can be considered — and by many accountants is always 
so considered — as either an asset or a liability. When so treated 
it is said that a Balance Sheet contains only assets and liabilities ; 
assets on the left, and liabilities on the right. 

The reasoning is as follows : 

If the Loss and Gain balance is on the debit side of the ledger, 
then it is considered as an asset; for as it represents a loss or 
deficit made during the year, and the proprietors of the business, 
as individuals, owe it to the business as a whole, in that sense it is 
an asset to be made good out of future profits or by assessment 
on the proprietors. It represents an asset of the business as a 
whole, but a liability of the proprietors as individuals. But if, as 



ACCOUNTANCY 215 

is more generally the case, the balance is found to be on the 
credit side of the ledger, then it indicates that a profit was made 
during the fiscal period, and the amount of this profit is owing by 
the business as a whole to the proprietors as individuals, and 
hence is a liability of the business. 

This is the way in which the subject is considered by most of 
the English accountants and by many of our accountants, and 
there should be no trouble in understanding it from this explana- 
tion. Of course, in this case, we must be careful to bear in mind 
always that the business must be considered as something quite 
apart from the person or persons to whom the business belongs. 

Suppose the business in addition to capital has a surplus of 
$1,000. Then the proprietor is a creditor of the business for 
$1,000. In other words, the business makes no distinction between 
its proprietor and any other creditor. 

Some high authorities prefer to consider the Balance Sheet 
more from the point of view of proprietorship, and this appeals 
to many as being more in accord with the facts, as follows : 

The Ledger Balance, as developed from the Ledger Trial Bal- 
ance, as already explained, shows assets on the left or debit side, 
and liabilities and proprietorship on the right or credit side ; and, 
as in the balance sheet the sum of the items on the debit side must 
be exactly the sum of the items on the credit side, we have the 
equation : 

Assets=Liabilities+Pi"oprietorship 

or 
Assets — Liabilities= Proprietorship. 

Here the assets will probably be in part made up of property 
held by the proprietor and in part of debts due to the proprietor. 
The liabilities will be entirely indebtedness due by the proprietor. 

Probably this presentation of the matter appeals more directly 
to the layman, for it is easily understood without instruction in 
accountancy that the value of our proprietorship in a business is 
the balance left after deducting our liabilities from our assets. A 



216 



LECTURE NOTES 



balance sheet to illustrate this point of view, might be in form as 
follows : 



Assets : 


$ 


Liabilities : 


$ 




















Total Liabilities: 
Proprietorship : 






$ 










Equal Total: 








$ 


Equal Total : 


$. 





I have already shown that the general books of account are, 
according to some authorities, the journal and ledger, and accord- 
ing to other authorities, the journal, the cash-book, and the ledger. 
The difference is more apparent than real, for in either case the 
cash-book is used. The difference is that where the cash-book is 
considered as one of the general books, the cash totals, debit and 
credit, are posted into the cash account in the ledger ; whereas, in 
the other case, the cash-book is considered as the cash account of 
the ledger separately bound. 

I have also shown that there may be many subdivisions of 
these general books of account, in addition to the auxiliary and 



ACCOUNTANCY 217 

statistical bcMDks. In carrying out such a scheme of subdivided 
classification as I have just described, there would be required, 
in addition to the general ledger, a number of subordinate or 
class ledgers. A good example of this is the many personal 
ledgers required in the keeping of the accounts with its depositors 
by a large bank, the consumers' ledgers of a gas company, etc. 

As a general proposition, each account in the general ledger, 
if subdivided, should comprise or summarize the entire con- 
tents of one subordinate ledger or a group of the subordinate 
ledgers. 

The general ledger accounts deal more with whole classes of 
like nature ; whereas, the subordinate ledger deals with each indi- 
vidual asset or liability, or with groups which may be treated as 
individual. It is the province of the general ledger to give in- 
formation in grand totals, and it is the function of the subordi- 
nate ledger to give information in detail, especially required for 
the analysis of working results and the comparison between the 
results obtained during different fiscal periods and between dif- 
ferent enterprises involved in the same character of business. 
Subordinate ledgers and cash receipts books are multiplied in 
some cases to enable many clerks to work at the same time. 
This is especially true in the case of books employed in connec- 
tion with a great number of personal accounts, the names of the 
customers being arranged alphabetically and each ledger or cash 
receipts book being devoted to a certain section of the alphabet. 

The practice with some is to give only the general accounts 
a place in the general ledger, and to carry all the subdivisions 
of these few general accounts in a series of subordinate ledgers. 
In this case the general ledger and the general accounts therein 
contained only give a bird's-eye view of the transactions. For 
some purposes this broad view is sufficient. For the detailed 
analyses and reports based thereon, the subordinate ledgers and 
records have to be consulted. 

In any and every case a Balance Sheet taken from the general 
ledger should be a true and complete exhibit of the condition 
of the business. Among the assets should be included all 
amounts owing for merchandise delivered or service rendered, 



218 LECTURE NOTES 

and among the liabilities should be included all debts incurred 
but not paid. In view of the fact that there are still to be 
found concerns of considerable magnitude which keep their 
books on a cash basis only — a most reprehensible practice — I 
again wish to impress upon you that the fundamental principles 
of sound accountancy demand that all transactions as they occur 
shall be recorded completely, and from the first entry, perhaps 
in some subsidiary book, to the last entry, which will be in the 
general ledger in condensed form, there shall be found a com- 
plete and truthful record of each and every transaction. 

There need not be, and there must not be, any violation of 
this fundamental rule by reason of the compressing of many 
transactions within small compass in the general ledger. 



ACCOUNTANCY 

Advance Payments and Accrued Expenses 

So important is it that you should understand that books of 
account should not be so kept as to show only transactions 
which have resulted in the passing of cash, but must show all 
transactions which involve liability to or from the other parties 
to the transactions, that I shall here further develop the point 
which I have covered briefly in my reference to adjusting entries. 
Without a clear understanding of the importance of this feature 
of accountancy, your study of the subject would be nearly value- 
less. It is because this feature is lost sight of that many state- 
ments of account are grossly misleading. 

Let us suppose that a manufacturing concern has to pay a 
large royalty on some patented invention and that by agreement 
the payments on this royalty are to be made semi-annually. Sup- 
pose it is intended that there shall be prepared a complete state- 
ment of the results of each month's operations — that is, a 
monthly statement of loss and gain. If in the statements for 
the ten months in which no royalty settlements are made, there 
is no mention made of these royalties, it is apparent that the 
income for two months of each year will be called upon to meet 
a large item of cost which should be spread pro rata over all 
of the twelve months of the year. Thus it will be made to appear 
that during the other ten months of the year the operating cost 
has been lower than the facts called for and so the profits are 
made to appear too large. It is quite possible that a most super- 
ficial examination of these monthly statements would show the 
reason for this wide variation in the rate of profit, but some 
calculation on the side would still be required to show the facts 
in connection with an exact and fair comparison. The obvious 
comment on such incomplete and imperfect monthly statements 
is, "Why not make them complete and self-explanatory?" This 
means, then, that every statement of loss and gain should in- 
clude not only the actual payments made during the period 



220 LECTURE NOTES 

covered by the report but also every item of accrued loss. It 
makes no difference whether the actual payment has been made 
or not, if the fiscal period covered by the report is, under the 
conditions of the business, required to meet a certain item of 
loss, the liability therefor must be included as one of the loss 
items of the period. 

And the same is true with regard to the income items. In 
the royalty case cited, considering the other party to the transac- 
tion, the receipts are not applicable to the month alone in which 
they are received, but they are applicable pro rata to each month 
covered by each payment. 

What is important with regard to the monthly statements of 
loss and gain is much more important with regard to half-yearly 
and yearly statements, because on these latter are based the cal- 
culations as to the division of profits or the paying of dividends. 
If a considerable item of accrued loss is omitted from a state- 
ment of loss and gain, to that extent the profits are shown greater 
than they are in fact; and if the total profit for the period is 
paid out in dividends, to that extent the dividend is paid from 
capital or surplus, and not from the earnings of that period. 

From this it is to be seen that in all statements of loss and 
gain, and especially those upon which dividends are declared, 
all accrued losses and gains should be included. 

Following this point a little farther, if these accrued losses 
and gains are to appear in a statement of loss and gain, they 
should first appear in the regular books of account. I specifically 
make this point, unnecessary as it may appear to some of you, 
because too frequently I have found that a statement of loss and 
gain was first made from the regular books of account and then 
by notes or comments, written or verbal or both, the actual 
facts were developed. Let me cite one instance: In the case of 
a manufacturing concern in which I was pecuniarily interested, 
I discovered that the statements of loss and gain prepared from 
the books of account were completely misleading and that it was 
necessary to supplement these statements of account by informa- 
tion on the side, part of it recorded in letter-books, part of it in 
pocket memoranda, and part not recorded at all. Special dis- 



ACCOUNTANCY 221 

counts had been allowed but not regularly recorded; special 
settlements of disputed accounts had been agreed upon, but 
pending the actual settlement, no record of the agreements had 
been made on the books of account; certain depreciation in 
manufactured goods had been recognized, but these goods 
were still carried on the books of account at their full original 
cost; and so on. This is not an extraordinary case. The man 
responsible as general manager was not an inexperienced man; 
on the contrary, he was a man of wide experience, well versed 
in the principles of accountancy as applied to industrial and 
commercial affairs, and a man who had before always managed 
successfully the concerns intrusted to his care. 
His fault originated in three causes : 

1. The commercial and shop details of this business were 
different from those of the business in which he had been trained. 

2. He did not surround himself with efficient assistants, and 
as a result he was overworked to the point of being threatened 
with complete nervous collapse. He was obliged to devote so 
much of his time to certain details in the shop and the count- 
ing-room, that certain other details were completely neglected 
and there was no time left to maintain a general and comprehen- 
sive view of the field. 

3. As the results from the business failed to verify his some- 
what rosy predictions, he made no great effort to keep in view 
and on record his accrued and accruing liabilities. And this 
without any deliberate intention to deceive. It would have been 
difficult for him in any case to have maintained at all times a 
completely accurate record of the modifications of his transac- 
tions. Pressed upon as he was by the conditions I have named, 
hoping for improvement in conditions, and being anxious not to 
alarm unnecessarily those who had invested in the undertaking, 
naturally his reports failed to show the facts. 

And let me warn you that this case I have cited is only one 
of many which have come under my personal observation and 
that you must be prepared to meet such conditions in the ordi- 
nary run of business. Especially those of you who may be called 
upon to report upon the value of industrial properties must 



222 LECTURE NOTES 

appreciate that no final estimate can be made until there is 
complete accord between the engineering or technical side of the 
report and the accounting or commercial side of the report ; and, 
in order to be sure that there is this accord, the engineer or 
technical expert must at least be able to understand, without the 
assistance of an interpreter, the accounting portion of the report. 
I have been called upon to investigate many cases worse than 
the one cited, and I am sorry to say that in some few cases it 
was quite apparent that the faulty statements of loss and gain 
were the result of deliberate and studied effort to deceive. 

Where there is deliberate intention to cheat, it may require 
an intimate knowledge of the business to discover the methods 
employed to deceive. 

I cannot attempt to name here the several lines to be watched, 
but to men who are to be engaged probably in the construction 
and operation of industrial plants, I may say that a fruitful 
source of error or opportunity for deception is where the opera- 
tion of plant and the construction of extensions of plant are pro- 
ceeding together under the same direction and supervision. If 
through carelessness, ignorance or intention, items chargeable 
properly against operating cost are charged against construction, 
the result is to impair capital and to show profits higher than 
they are in fact. This mistake is easily made and is hard to dis- 
cover where the same men are employed on both classes of work. 
I could give you many instances of this kind. 

Referring to the classification book of the American Gas Light 
Association, I will now consider in some detail three of the 
accounts therein named and described. 

My object is twofold : 

First, to illustrate the make-up of a classification book ; 
Second, to explain in detail the questions involved in advance 
payment accounts and accrued loss accounts. 

It is to be noted with the accounts to be considered there 
appears no schedule of items chargeable to the accounts, because 
they have to do only with one item — taxes. 



ACCOUNTANCY 223 

This feature will be brought out later in our study of 
"Accountancy as Applied to Depreciation." 

First, recall the fundamental rule already explained, that in 
making up a statement of income and expense for any period 
there must be included all items of expense or loss, whether 
they have been so far actually paid or not ; and that credit must 
be taken for such amounts as have been paid in advance as 
applicable to a subsequent period only as items of expense or 
loss. 

These loss items which have accrued but have not been paid, 
when debited to Loss and Gain Account are through the credit 
side of entry established as liabilities as to the future, and must 
so show on the Balance Sheets until liquidated. The payments 
made in advance on account of expenses, when credited to Loss 
and Gain Account are through the debit side of the entry estab- 
lished as assets and must so show on the Balance Sheets until 
liquidated. 

I have selected the case of taxes by which to explain this 
principle. 

In the classification book referred to, the account "Taxes" 
appears among the operating accounts; the account "Advance 
Taxes" appears among the advance payment accounts; the 
account "Accrued Taxes" appears among the accrued accounts. 

I now quote from the classification book referred to : 

Taxes 

This account is intended to show the amount of taxes, whether paid, 
due and not paid, or accrued but not due, applicable to the elapsed period 
of the current fiscal year. 

Taxes — City, County and State. 

To keep this account accurately, it is necessary to ascertain the specific 
twelve months for which each class of taxes is assessed and levied. If 
the period covered by tax levy corresponds with the fiscal year of the 
company, and the taxes are paid at the beginning of the period for which 
such levy is made, the amount when paid should be charged to "Advance 
Taxes"; but if the taxes are due and payable at the end of the period for 
which such levy is made, the amount when paid should be charged to 
"Accrued Taxes." 



224 LECTURE NOTES 

If the period covered by any tax does not correspond with the fiscal 
year of the company, the amount of the tax when paid should be divided 
between "Accrued Taxes" and "Advance Taxes" in the proportion apph- 
cable to each. 

(Payments charged to "Advance Taxes" shall always be for taxes cover- 
ing a period subsequent to the date such payment is made, and payments 
charged to "Accrued Taxes" shall always be for taxes covering a period 
prior to the date such payment is made.) 

Journal entries should be made each month charging "Taxes" and 
crediting "Advance Taxes" with the proportion (one twelfth) of each 
class of taxes paid in advance and charging "Taxes" and crediting 
"Accrued Taxes" with the proportion (one twelfth) of each class of 
taxes, accrued but not due, based upon the amount shown by the tax rolls, 
if made up, or if not made up, on an estimated amount based on the 
previous year's tax or any other reliable data. 

Taxes assessed for Improvements to be charged to Real Estate 
Account (see "Real Estate"). 

Journal Entries 
Taxes, $000.00 

Advance taxes, $000.00 

For proportion of taxes paid in advance, applicable 

to the month of . 

One twelfth of $ — $ 

State and County, one twelfth of $ =$ 

City and School, one twelfth of $ =$ 

Taxes, $000.00 

Accrued taxes, $000.00 

For estimated taxes accrued, but not due, applicable 
to the month of . 

State and County, one twelfth of $ =$ 

City and School, one twelfth of $ =$ 



I 



Note. — At end of the year close this account (Taxes) into "Loss and 
Gain." 

In the classification book is shown in place of Loss and Gain 
Account another account into which "Taxes" is closed on its way 
to Loss and Gain Account; for simplicity, I show it as going 
direct into "Loss and Gain." 

Advance Taxes 

This account is intended to show the amount paid for taxes covering 
a period subsequent to the date such payment is made. 



ACCOUNTANCY 225 

Credit this account and charge Taxes Account each month with pro- 
portion of taxes applicable to this month. 
See following entry: 

Taxes, $000.00 

Advance taxes, $000.00 

For proportion of taxes paid in advance, applicable 

to month of . 

One twelfth of $ = $ 

State and County, one twelfth of $ =$ 

City and School, one twelfth of $ =$ 

Note. — See "Taxes" for full explanation. 

Accrued Taxes 

This account is intended to show the amount of taxes accrued but not 
due, covering a prior period. The balance of this account will at all times 
show the accrued liability for taxes. 

Credit this account and charge Taxes Account each month with esti- 
mated amount of taxes accrued, but not yet due or payable — estimate 
to be based on previous year's tax bills, unless accurate method of esti- 
mating for current year can be arrived at. See the following entry : 

Taxes, $000.00 

Accrued taxes, $000.00 

For estimated taxes accrued, but not due, applicable 
to month of . 

State and County, one twelfth of $ =$ 

City and School, one twelfth of $ =$ 

Note. — See "Taxes" for full explanation. 

The explanations as contained in these three pages of the 
classification book would be all-sufficient for one familiar with 
accounts. 

But I have found that you are not able from these descrip- 
tions to understand fully all the accounting steps to be taken in 
connection with taxes. I will therefore go into this matter in 
some detail with the purpose of explaining directly this particu- 
lar case and incidentally advance payments and accrued accounts 
in general. 

First, turn back and read again the note in parenthesis as 
quoted from the classification book under the head of "Taxes." 



226 LECTURE NOTES 

Remember, then, that "Taxes" is the only one of the three 
which is an expense or a loss account. "Advance Taxes" is an 
asset account, and "Accrued Taxes" is a liability account. 

Now note that in both the journal entries, "Taxes Dr. to 
Advance Taxes" and "Taxes Dr. to Accrued Taxes," the account 
"Taxes" is debited with one twelfth of the total yearly pay- 
ment for taxes. Thus all the debits for taxes are made through 
the journal and when the cash is actually paid cash will be 
credited and the debit must be made against some other account 
than "Taxes" or we should have this expense or loss account 
debited twice with the same amount paid. 

If a tax bill is paid, part of which applies to a period subse- 
quent to the date of payment, that part will be debited to 
"Advance Taxes." Then the debit balance of this account will 
represent an asset, the asset being reduced monthly by the journal 
entry : 

DR. OR. 

Taxes, $000.00 

Advance taxes, $000.00 

Here the cash transaction, and hence the cash entry precedes 
the journal entry. 

In the case of taxes paid after the liability has accrued, the 
journal entry 

Taxes, $000.00 

Accrued taxes, $000.00 

precedes the cash entry. 

The balance so built up to the credit of "Accrued Taxes" 
represents a liability. 

Later, when the cash is paid, cash will be credited, and so 
much of the cash payment as is applicable to periods prior to 
the payment will be debited to "Accrued Taxes," wiping out the 
liability balance built up by the journal entries which preceded 
the cash entry. 

It is, then, to be particularly noted that in the case of "Ad- 
vance Taxes" the cash entry precedes the journal entry, and in 



ACCOUNTANCY 



227 



the case of "Accrued Taxes" the journal entry precedes the 
cash entry. 

In the first case an asset balance is set up by the payment 
of cash in advance, and in the second case a liability balance is 
set up by the charging up monthly to ''Taxes" (a loss and gain 
account) the amounts for which the business has become lia- 
ble, but for which the date of payment has not yet arrived. 

Let us take a fairly simple case and follow through the 
necessary journal and cash entries. 

We will assume that the several tax bills cover the same 
year and that this year and the company's fiscal year coincide, 
and that the tax bills are paid June 30 of each year. 

To make sure that I am understood, I give the following 
diagram : 



Jan. 1, '03 



Year cove 



Dec. 31, 

Company's Fiscal Year. 
Year Covered by Tax Bills. 



<Accrued Taxes> | <Advance Taxes> 
V 

Bill paid June 30th. 
red by Tax Bills. ^ 



Year cover 



Case assumed. 



ed by Tax Bills. 



Cases 
not as- 
sumed. 



The last two cases might be further varied by showing more 
or less of the tax year prior to January 1/03 (to the left of the 
January 1 vertical line) or by showing more or less subsequent 
to December 31/03 (to the right of the December 31 vertical 
line). 

Further variations could be introduced by indicating dififer- 
ent times for the payment of the several tax bills. 

In the case we have assumed, when the tax bill is paid June 
30, one-half of the payment applies to the prior six months and 
the other half to the subsequent six months. 

Now suppose we are carrying into our ledger accounts each 
month all items of loss and gain. 



228 LECTURE NOTES 

Then at the end of each month of the first six months of the 
year we shall have to employ the journal entry: 

DR. CR. 

Taxes, $000.00 

Accrued taxes, $000.00 

For estimated taxes accrued, but not due, applicable 
to month of (January or February or March or 
April or May or June) being one twelfth of 
$ , etc. 

By the end of June we shall have a debit balance to the loss 
account, "Taxes," equal to one half of the yearly charge for 
taxes (provided our estimate was correctly made) and a credit 
balance to "Accrued Taxes" of like amount, showing the liability 
established in advance of the payment. 

Now, according to our assumption, the tax bills are paid 
June 30. 

Then cash is credited for the total amount paid and one 
half is debited to "Accrued Taxes" and the other half to 
"Advance Taxes." 

The half debited to "Accrued Taxes" wipes out the credit 
balance which has been built up by the monthly journal entries. 
This credit balance showed that the business was liable for that 
amount on account of taxes accrued. But the business, through 
cash, now pays this accrued liability, and so cash is credited 
and "Accrued Taxes" is debited, the money having been paid on 
its account. So the records are now clear as far as Accrued 
Taxes Account is concerned. 

The other half of the cash payment, debited to "Advance 
Taxes," sets up an asset account. It gives a debit balance to 
"Advance Taxes," representing money paid out in advance 
which is to be paid back in service to be rendered by the State, 
County and City in the way of police protection, fire protection, 
street cleaning, etc. 

This balance to the debit of "Advance Taxes" will be reduced, 
month by month, by the entry : 



^ ACCOUNTANCY 229 

DR. CR. 

Taxes, $000.00 

Advance taxes, $000.00 

as already explained. 

By the end of the year these successive journal entries will 
wipe out the debit balance of "Advance Taxes." 

And so both "Accrued Taxes" and "Advance Taxes" will 
be balanced and "Taxes" will show a debit balance representing 
the total amount of taxes for the year. 

By this method each month's cost has taken its share of the 
year's taxes irrespective of any question of time of payment 
of the tax bills. 

But it may be objected that, without employing the journal 
entries, the Loss and Gain Account for the year would have only 
had to bear the charge for its year's taxes. 

That is true in the case assumed, where the tax year and the 
company's fiscal year coincide, but it would not be so in the 
other cases more likely to occur. Furthermore, without these 
journal entries the operating cost would not be shown correctly 
month by month. 

Suppose that the tax year and the date of payment are such 
that part of the bill paid prior to December 31 applies to the 
subsequent year. Then, as explained, this portion will be 
debited "Advance Taxes," cash taking credit for the total 
amount paid. Then the debit balance to "Advance Taxes" will 
represent as many twelfths of one year's taxes as there have 
been months paid in advance. That is, as many twelfths as 
have not been wiped out by the monthly journal entries "Taxes 
Dr. to Advance Taxes" made subsequent to the payment of the 
bill. 

This balance to the debtor of "Advance Taxes" will be car- 
ried over on the ledger to the next year and will appear in the 
Balance Sheet of January 1 as an asset. 

Now suppose that the tax year and the date of payment 
are such that at the end of the year there is a certain portion 
of the year's taxes not paid. The liability has accrued but the 



230 



LECTURE NOTES 



bill to include these months will not be due and payable until 
some time in the company's next fiscal year. 

Then we shall have a credit balance to "Accrued Taxes" built 
up by the monthly journal entries ''Taxes Dr. to Accrued 
Taxes," representing a liability for so many twelfths of the 
year's taxes as there are months accrued. 

This balance to the credit of "Accrued Taxes" will be car- 
ried over on the ledger to the next year and will appear in the 
Balance Sheet of January 1 as a liability. As already explained, 
when during the subsequent year, the tax bill is paid, cash will 
be credited for the total amount and "Accrued Taxes" will be 
debited for an amount equal to the credit balance, which balance 
will include the amount brought over from the previous year. 

To illustrate further that "Accrued Taxes" and "Advance 
Taxes" appearing in the Balance Sheet of January 1 will repre- 
sent a liability and an asset respectively, we may consider how 
cash will be influenced by these accounts. Suppose there is 
carried over to the next year a certain balance to credit of 
accrued taxes; this indicates that taxes which have accrued and 
been charged to tax account as part of the year's expense have 
not been paid and therefore the cash on hand as indicated by 
the debtor balance of Cash Account is that much larger than it 
would have been if this debt of the year had been paid. Hence 
we must show a liability to offset the additional cash on hand 
by reason of this debt. 

On the other hand, suppose we have paid taxes in advance 
for a number of months of the next year, then a certain amount 
will have been taken out of cash on account of next year and 
the asset cash will be correspondingly reduced. But the condi- 
tion of the business as of January 1 is the same as though the 
cash had not been paid in advance, therefore the reduction of 
the asset cash is made good by the equivalent asset of advance 
taxes. 

I have been asked, What happens if the estimate we make 
for the entry, "Taxes Dr. to Accrued Taxes," is not correct? In 
this, as in many other instances, we have to base our journal 
entries on estimate. Here comes in the judgment of the man 



r 



ACCOUNTANCY 231 

of business and here, in many cases, must come in the judgment 
of the engineer. In case of a mistake, the correction must be 
made by journal entry to correspond with the facts. 

These steps in connection with taxes, if carefully followed 
through, will show that by the double-entry system of bookkeep- 
ing we can make the accounts for each period show, with reason- 
able accuracy, the period's proportion of all items of loss and 
gain and all assets and liabilities. It will be seen that if we 
guided ourselves only by the entries made to show cash received 
and cash disbursed, this would not be the case. The transfer 
of cash is only one feature of a commercial transaction, and in 
some transactions cash is not transferred at any time. 

Printed Forms 

A scheme of accounting which has to do with a business of 
any magnitude should provide for a minimum of clerical labor 
by the use of all available mechanical aids, such as machines for 
computing, receipting of vouchers, and the like; also printed 
forms or blanks, bound and unbound, to meet cases of the same 
general character. Manifestly, it would be absurd to have a 
printed form or blank for such cases occurring only at long inter- 
vals ; but it would be equally as absurd to write out in each case 
all the words and figures of a record, communication, or report 
if a considerable portion thereof might preferably follow an 
established form. 

There are many advantages in such a system of printed forms 
or blanks ; I will mention four which occur to me at once. 

1. It lightens the labors and saves the time of those engaged 
in the detail work. 

2. It serves to remind the writer what information is re- 
quired. This is particularly important, because the memory 
cannot be relied upon safely in the press of business. 

3. It presents the information in conformity with a uniform 
practice, so greatly reducing the labor of analysis and comparison 
on the part of those for whom it is intended. 

4. It furnishes the opportunity for a simpler and more easily 
operated system of filing, — one of the most important features 
of a large and complicated business. Only those who have prac- 



232 LECTURE NOTES 

tical experience in the conduct of affairs can appreciate the woful 
waste of time and energy and the paralysis of useful effort 
occasioned by the absence of an adequate and well-balanced filing 
system; though here unnecessary complication is quite as much 
to be dreaded as insufficiency of system. And many of those 
who have had this experience fail to estimate correctly the magni- 
tude of the loss in efficiency due to inability to locate data which 
should be available at once and without specific effort. 

For these and other reasons much saving of labor and greatly 
increased efficiency can be obtained through a well-developed, 
common-sense system of printed forms. 

Outside of accounting, blank forms can be used to great ad- 
vantage, insuring greatly increased efficiency in performance 
and providing accurate records for future reference. 

I say outside of accounting, but it is to be remembered that 
many of these records which never come under the eye of the 
accountant and which are prepared by men ignorant of ac- 
countancy, serve as the ground work for much of the account- 
ant's work. I will refer to only one case, which, no doubt, is 
more or less familiar to all of you and for that reason serves 
all the better by way of illustration. 

Railroads have to do with an immense amount of detail in 
their several departments, and especially in the operating depart- 
ment. Blank forms, in great variety, are employed to facilitate 
prompt and accurate action and the maintenance of correct 
records. It can be seen that especially in the case of instruc- 
tions to be sent over a wire it is important the messages should 
be conveyed with absolute accuracy and at the minimum expen- 
diture of time. The instructions must be condensed as far as 
possible without sacrificing clearness and explicitness. 

Take, for instance, a wreck. The conductor must get the 
news to the proper officials without delay. If he had to write 
out every word required to make a correct and comprehensive 
report, he would have to write many minutes longer than when 
using a blank form, and there would thus be an unnecessary 
delay in conveying the information to the officials from whom 
instructions and assistance are required. Furthermore, at such 



ACCOUNTANCY 233 

a time of mental stress, his memory could not be relied upon, 
for we know that memory cannot be depended upon even under 
normal conditions. 

To meet this emergency a blank is used which has spaces 
for every item of information which past experience has sug- 
gested. Opposite each of these spaces are certain words which 
ask a direct question, and in each case the question is indicated 
by a cypher, either a letter or a number. The conductor of 
the train which has been involved in the accident proceeds to 
the nearest telegraph station on his line and calls for this blank 
form, ''Accident Report by Telegraph." He fills in the blank 
spaces as required and, as I have said, he is thus reminded of 
each item of information which the official to whom he is report- 
ing will require of him. As soon as the blank is filled up, the 
operator calls for the operator at the other end of the line and 
tells him to provide himself with ''Accident Report by Tele- 
graph" blank. The operator at the scene of the accident then 
gives the cypher for the first blank space, followed by the in- 
formation which the conductor has filled in; and so he goes 
down through the whole form and promptly conveys to head- 
quarters the information required to meet the emergency which 
has arisen. The receiving operator, as soon as he receives the 
cypher, turns to that space in his blank and fills in all that 
comes over the wire until the next cypher is signaled. 

It can be seen readily that not only does this give the oppor^ 
tunity for headquarters to do everything possible to correct 
promptly and efficiently the troubles brought about by the acci- 
dent, but a complete record is furnished which can be referred 
to with confidence in case of law suits or other complications. 

Furthermore, there are other advantages, because such a 
system, carried out completely, must lead to great saving in the 
expenditures for wages, and also must lead to reductions in the 
cost of plant. Take the case just referred to; a single wire 
would be capable of conveying a much greater volume of infor- 
mation when so much of that information is reduced to cypher 
form. If the use of telegraph blank forms were confined to 
reporting wrecks, this item of investment in, and maintenance 



234 LECTURE NOTES 

of, telegraph plant might be unimportant, because of the com- 
paratively limited number of accidents; but an immense number 
of blanks are employed for other purposes which require the 
constant use of the telegraph ; namely, the reporting of the move- 
ments of cars and their presence at stations ; reports of conduc- 
tors showing the make-up of their trains ; reports of freight at 
various points along the line, etc. 

In the operation of a number of properties under one owner- 
ship, through a uniform system of accounting, the importance 
of a well-considered scheme of printed forms can hardly be 
overestimated. In the collecting of the information required for 
the permanent statistical records, and for the classifying of 
items of expenditure for the guidance of the bookkeepers, they 
are a necessity. Where daily, weekly or monthly reports are 
rendered by the several outlying stations to the home office, it 
is essential that these reports should be uniform in arrangement 
so that comparisons can be made readily between the several 
reports of each station and the like reports of the several stations. 
The uniformity in comparisons thus secured in the monthly 
statements of operating cost, minutely subdivided, is of the 
utmost value. 

But there is a danger in this connection; namely, the danger 
of going to extremes — a danger always to be feared and avoided. 
System, overdeveloped, becomes red tape, and that perhaps is 
to be avoided almost as much as lack of system. A full appre- 
ciation of efficiency in performance should precede appreciation 
of efficiency in the recording of results. If the keeping of the 
records and the accounting are allowed to obstruct the progress 
of the business, it is only a question of time when there will be 
no business to record. The highest attainable efficiency in per- 
formance and the most explicit and convenient forms of record 
should go hand in hand. The keeping of a reasonably complete 
and detailed set of records helps to increase the profits from a 
given volume of business and also helps to increase the volume 
of business. Unless by the records results can be analysed 
accurately, it is difficult and often impossible to eliminate weak- 
nesses and uneconomical items of management. It is not suffi- 



ACCOUNTANCY 235 

cient to know that the business is profitable as a whole; the 
results should be known step by step. 

In connection with our tremendous development in industrial 
lines, there is springing up a new business ; namely, that of the 
efficiency engineer, production engineer, engineer accountant, or 
economy engineer, for these and other titles have been used. 
Quite a number of our graduates are specialists in this line, and 
it is not out of place to mention Frederick W. Taylor, Henry L. 
Gantt and E. R. Douglas. Mr. Taylor's name appears promi- 
nently in the present-day discussions of efficiency. Mr. Gantt's 
lecture on Task and Bonus in Management is included in this 
volume. Mr. J. Newton Gunn, of Gunn, Richards & Co., is a 
prominent and most practical worker in this field; and I am in- 
debted to him for the chapter on Costs. 

Men to be competent in this line must be well qualified in 
industrial matters, especially shop practice, and also qualified as 
accountants. They must be capable of analysing the records and 
accounts of a business so that they can detect uneconomical steps 
in shop practice and management; and, having detected such 
weaknesses, they must be competent to devise methods for im- 
provement. Sometimes these methods of improvement have to 
do with changes in the system of management or of control, and 
sometimes they have to do with changes in processes of manu- 
facture. It will, therefore, be seen that the field is an extremely 
wide one and calls for theoretical ability of a high order, re- 
enforced by wide experience and balanced by good judgment. 
It by no means follows because a man preaches efficiency that 
he practices what he preaches. 

An efficient system of shop cost records should furnish the 
means for comparing, month by month, every item of cost. If 
such an inspection of the records shows that during a certain 
month a selected item of cost has been increased, at once it is 
suggested that an investigation should be instituted to learn the 
cause or causes of this increase. It is only by such continual 
exercise of competent and vigilant comparisons that the costs of 
a large business can be kept within competitive limits. 

There is constantly an immense waste of time and nerve 



236 LECTURE NOTES 

force through the lack of well-arranged records, this deficiency 
making it necessary to ''dig out" information which ought to be 
at hand, complete and ready for use as required. Not only is 
time thus wasted, but busy men have their burdens immensely 
increased by the pressure resting upon them through duties 
unperformed. Often the hardest part of a task is getting the 
work started, and this because we have not at hand certain data 
which we have previously developed but which are not now in 
form for ready reference. 

In this connection I may well refer to the advantages of the 
card system. There are concerns now that make a specialty 
of working up to order card index schemes for all special cases, 
supplying not only the cards but also the furniture required to 
make the scheme complete. I remember the time when a man 
who adopted the card system had to work up his own scheme, 
had to have his own material manufactured and then secured a 
result far inferior to what can now be secured at small expense 
through the services of experts in that line. 

If a card system is adopted for the filing of data collected 
outside of the office, some systematic scheme must be developed 
whereby these notes will be passed from time to time into the 
hands of those responsible for the maintenance of the scheme. 
One good arrangement which does away with the necessity of 
doing the work twice is to keep in your pocket a package of 
cards, of convenient size, the blank cards in one side of a wallet, 
and those which have been written on in the other side. As it 
becomes necessary to make a memorandum of data obtained, 
the information can be filled in on one of these cards and the 
card then put in with those ready for filing. From time to time 
the cards containing data can be passed over to the filing clerk 
and a like number of blank cards placed in the wallet. This 
arrangement can be supplemented by having envelopes of exactly 
the same outside dimensions as the cards, so that when a news- 
paper clipping or the like is to be preserved it can be placed in 
one of these envelopes, and as the envelopes are of the same 
outside dimensions as the cards, the pack can be manipulated 
conveniently. 



ACCOUNTANCY 

Analysis of a Balance Sheet 

The ability to analyse a ledger balance sheet is of prime impor- 
tance to the man who wishes to know for himself the cost of pro- 
duction of any commodity and the condition of a business as a 
whole as represented by the books of account. This ability is a 
necessity in the case of one who aspires to a position of leadership 
in the industrial field. In this brief course we cannot hope to 
qualify our students to interpret a complex balance sheet, but they 
can be qualified as to the fundamentals and shown how to profit 
later most rapidly by study in the school of experience. The man 
who does not understand the principles of accountancy to the 
extent of being able to analyse the items of all the accounts 
involved, must accept the balance sheet on faith. 

It by no means follows that a balance sheet, because it shows the 
complete ledger record, correctly represents the condition of a 
business. 

Nor does it necessarily follow that because the statement of loss 
and gain is made up correctly as far as the ledger records go, that 
the statement is complete and correct. 

I shall now show how a balance sheet is developed from a trial 
balance. 

I shall consider the simplest possible case — that of a firm, com- 
posed of two equal partners, engaged in a merchandising business 

The Trial Balance is a statement prepared by taking off from 
the ledger the debit or credit balance of each open account. The 
''balance" of each account is found by footing up the debit and 
credit entries and deducting the smaller sum from the larger ; the 
difference is the ''balance." This work is done in pencil, the 
"balance" being written to the left of the dollars-and-cents column 
on the side which shows the larger sum. Frequently the trial 
balance is taken off from the ledger so as to show the debit and 
credit totals as well as the balances. As the title implies, one 
reason for taking off the Trial Balance is to prove the ledger — to 



238 LECTURE NOTES 

find whether the sum of the debit balances equals tne sum of the 
credit balances ; if the ledger does not balance, nothing further 
can be done until the errors are found and a balance obtained. 

The Balance Sheet is the statement of the balances of all open 
accounts after closing the books by consolidating all loss and gain 
accounts and all loss and gain items in the account called Loss and 
Gain. 

In the example now to be considered it is assumed that the fiscal 
year is coincident with the calendar year — from January 1 to 
December 31. First is shown a Trial Balance taken from the 
ledger at the end of the business, December 31, 1903. If not 
actually taken off at that time, it is taken off as of that date — 
that is, any transactions which have occurred after that date are 
not posted into the ledger until the transactions for the year 1903 
have been finally adjusted, preparatory to the ledger being re- 
opened for the year 1904 ; or, if they have been posted, the work 
has been so done as not to confuse the entries of 1904 with those 
of the previous year. 

Next is shown the journal entries required to close the books 
for the year just ended. These entries form the basis for trans- 
ferring all the loss and gain items and accounts as scattered 
through the ledger to the one account of Loss and Gain (also 
known as Profit and Loss), thus obtaining in the one ledger 
account a balancing of all losses and gains. 

One journal entry charges or debits Loss and Gain Account 
with the debit balance of each loss account or the sum of these, 
and credits each of these loss accounts with the balance to its 
debit, thus closing these accounts. For every debit there must 
be a credit; and as we are transferring the debit balance from 
each separate account to the one general account, that there may 
not be a duplication of the debit balance, the separate account 
must be closed by a credit entry equal in amount to the debit 
balance. Another journal entry credits Loss and Gain Account 
with the credit balance of each gain account or the sum of these, 
and debits each of these gain accounts with the balance to its 
credit, thus closing these accounts. 

Next is shown the Loss and Gain Account as it appears in the 



K 



ACCOUNTANCY ' 239 

ledger after these two journal entries have been posted. The 
balance of the Loss and Gain Account now shows the profit for 
the year, or should do so. 

Next comes a third journal entry which debits Loss and Gain 
Account with the balance found and credits to the personal 
account of each of the two partners one half of the net profits 
as indicated by the credit balance of Loss and Gain Account. In 
the case of a stock corporation this last entry would not be made, 
but the balance sheet would show the Loss and Gain balance as an 
undivided profit, the dividends as paid being charged later to this 
account. Finally is shown the Balance Sheet as taken from the 
ledger after all the closing journal entries — three, in this simple 
example — have been posted. The Balance Sheet so obtained will 
contain the balances of all the accounts remaining open in the 
ledger. When proved — the sum of the debit balances being 
found equal to the sum of the credit balances — the accounts are 
ruled off in ink, and in the case of the open accounts the balances 
are brought down below the ruling, thus reopening the ledger for 
the new year. 



240 



LECTURE NOTES 



Ledger Trial Balance 

(Showing the debit and credit balances of all accounts in the 
ledger, taken off before closing the books for the year; that is, 
before carrying into Loss and Gain Account the several loss and 
gain items of the fiscal year ended December 31, 1903.) 







Dr. 




Or. 




Cash 




18 


675 


64 








Advance Interest 






650 


00 








Interest Receivable 






325 


45 








Bills Receivable 




7 


000 


00 








Accounts Receivable 


If- 


6 


745 


87 








Merchandise Stock 


23 


874 


25 








Phoenix Gas Bonds 


°o 


2 


800 


00 








Norfolk and Western R. R. Stock 


t 2. 


1 


450 


00 








Office Furniture and Fixtures 


5*^ 


2 


184 


27 








Real Estate 


a 3 


5 


500 


00 








Expense General 


a tj 




965 


88 








Advertising 


>^- 


2 


000 


00 








Salaries and Wages 


O CJ 


10 


600 


00 








Salary Bonuses 


rj O 




500 


00 








Traveling Expense 
■Agents' Commissions 


Ba 


5 


675 


86 








^z 


8 


764 


76 








'Discount and Interest 


5*-. 




845 


65 








Store and Office Expense 


is 


4 


576 


83 








Accounts Not Collectible 




785 


00 








Merchandise Sales 


o-S 








60 


650 


24 


Erie R. R. Stock 


%^ 










560 


40 


J. E. Thomas— Personal Account 
W. L. Sharp— Personal Account 


^ r 








2 


422 


63 


«»(B 








2 


213 


36 


J. E. Thomas -Capital Account 
W. L. Sharp— Capital Account 


9 Oi 
Eon? 








15 


000 


00 


3(? 








15 


000 


00 


Interest Payable 


"^ 










465 


00 


Salaries and Wages Payable 












540 


00 


Accounts Payable 










2 


567 


83 


Bills Payable 










4 


500 


00 




103 


919 


46 


103 


919 


46 



ACCOUNTANCY 



241 



Journal 

(Closing entries, assumed to be made on page 75, showing the 
entries made in the journal as a basis for transferring to Loss 
and Gain Account the several loss and gain items shown sepa- 
rately on the Trial Balance.) 









Dr 






Cr. 






19 


03 


















Dec. 


31 


Loss and Gain Account, Dr. 

to Sundry Accounts as below: 
Expense General 


t^ 


35 


778 


16 




965 


88 






Advertising 


S"^' 








2 


000 


00 






Salaries and Wages 


It 

si 








10 


600 


00 






Salary Bonuses 










500 


00 






Traveling Expenses 
Agents' Commissions 








5 


675 


86 












8 


764 


76 






Discount and Interest 


ll 










845 


65 






Store and Office Expense 








4 


576 


83 






Accounts Not Collectible 


O M 

O en 










785 


00 






Merchandise Stock 


^2 


















Depreciation 4% on $23874.25 










954 


97 






Office Furniture and Fixtures 


CO J 


















Depreciation 5% on $2184.27 


^g 










109 


21 






Closing books for year ended this date by 




















transferring loss items to Loss and Gain 


1% 


















Account. 


%^ 


















Sundry Accounts as below, Dr. 
to Loss and Gain Account: 


^^ 


















2 D. 








61 


210 


64 






Merchandise Sales 


b'S 


60 


650 


24 












Erie R. R. Stock 


0^% 




560 


40 












Closing books for year ended this date by 




















transferring gain items to Loss and Gain 




















Account. 

















Ledger 



LOSS AND GAIN ACCOUNT 



(As the account appears in the ledger after posting the two 
journal entries above and before posting the journal entry to 
follow which indicates the division of profits between the two 
partners. These postings, as far as Loss and Gain Account is 
concerned, can be made in detail, as shown, or in one amount 
on each side as shown in the journal entries, $35,778.16 and 
$61,210.64, respectively. The expanded form is used here 
as being more self-explanatory.) 



242 



LECTURE NOTES 



Dr. 


















C 


r. 




19 


03 










19 


03 












Dec. 


31 


To Journal 7 


5 


965 


88 


Dec. 


31 


Bv Journal 


75 


60 


650 


24 






(( i( J 


' 2 


(KM) 


(K) 






" 




560 


40 








\ ^0 
' 5 

! ^ 

' 4 


600 
500 
675 
764 
845 
576 


00 
00 
86 
76 
65 
83 






/ 














a (i ( 




785 


00 






y^ 














n n ^ 




954 


97 






y^ 














H U I 




109 


21 






/^ 














To Balance carried down 


25 
61 


432 
210 


48 
64 






^ 




61 


210 










64 














19 
Dec. 


03 
31 


By Balance brought down 




25 


432 


48 



Journal 

(Showing the entry in the journal dividing the profits as indicated 
by Loss and Gain Account equally between the two partners. 
Entry is assumed to be made on page 76 of the journal.) 



Dr. 



Cr. 



19 
Dec. 



Loss and Gain Account, Dr. 

to Sundry Accounts as below: 
J. E. Thomas, Personal Account 
W, L. Sharp, Personal Account 

Dividing between the Partners the profits 
for the year as shown by "Loss and Gain." 





25 


432 


48 


12 
12 


716 
716 



Ledger 
loss and gain account 



(As the account appears after posting the above journal entry 
which divides the profits as shown by Loss and Gain Account 
between the two partners, omitting the details previously shown 
above the footings.) 



ACCOUNTANCY 



243 



Dr. 



Cr. 



19 
Dec. 



To Journal 



76 


61 210 64 


19 
Dec. 


03 
31 


12 
12 


716 
716 


.4 
24 


25 


432 


48 













By Balance brought down 



210 



64 



48 



Ledger Balance Sheet 

January 1, 1904 

( Showing the accounts open in the ledger after posting from the 
journal all the closing entries and the entry dividing the profits 
between the two partners, that is, the condition of the ledger 
when reopened for the business of 1904.) 











Dr. 




C 


r. 








Assets: 




















Cash 


<?^ 


18 


675 


64 












Advance Interest 






6 


00 












Interest Receivable 


^- 




325 


45 












Bills Receivable 


^o 


7 


000 


00 












Accounts Receivable 


^5" 


6 


745 


87 












Merchandise Stock 


%^ 


22 


919 


28 












Phoenix Gas Bonds 


2o 


2 


800 


00 












Norfolk & Western R. R. Stock 


>rr; 


1 


450 


00 












Office Furniture and Fixtures 


f^/? 


2 


075 


06 












Real Estate 


O tfi 


5 


500 


00 












Liabilities: 


bo. 


















J. E Thomas— Personal Account 


» o 








15 


138 


87 






W. L. Sharp— Personal Account 


?3 








14 


929 


60 






J. E. Thomas— Capital Account 


n t- 








15 


000 


00 






W. L. Sharp-Capital Account 


<y^ 








15 


000 


00 






Interest Payable 


2 Q 










465 


00 






Salaries and Wages Payable 


US 










540 


00 






Accounts Payable 








2 


567 


83 






Bills Payable 


o & 








4 


500 


00 






























68 


141 


30 


68 


141 


30 



It is to be understood that the notes in parenthesis beneath the 
titles of the several statements shown are not part of the entries, 



244 LECTURE NOTES 

but are introduced as guides by the way. On the other hand, the 
explanations at the end of the journal entries are parts of those 
entries, for each entry should be self-explanatory. 

The problem now is, How is the Balance Sheet derived from 
the Trial Balance? 

First the rule must be recalled which shows that balances on 
the left or debit side of the ledger are: 

Assets, if they represent moneys to be received or regained. 

Losses, if they represent moneys not to be received or regained. 

Balances on the right or credit side of the ledger are : 

Liabilities, if they represent moneys to be paid or returned. 

Gains, if they represent moneys not to be paid or returned. 

It is not probable that this rule can be applied to the Trial 
Balance in the case of every account unless additional informa- 
tion is available, but in the case of many of the accounts the facts 
can be determined by inspection. 

As we examine the Trial Balance, which shows all the asset and 
loss accounts on the left and all the liability and gain accounts on 
the right, we find first on the left a number of asset accounts, as 
they represent moneys which we have the right to believe will be 
received. 

"Cash," $18,675.64, represents money that we can demand from 
the bank or other depository. 

"Advance Interest," $650, represents money that we have paid 
in advance of December 31, 1903, as interest for money borrowed, 
and the service we have thus paid for is yet to be received. This 
represents, then, cash which has been paid in advance to cover 
one of the losses of the year 1904, and therefore instead of being 
debited to "Discount and Interest" as one of the losses of 1903, it 
has been debited temporarily to "Advance Interest." The amount 
has been borrowed from cash on account of the year 1904. If it 
represents the interest deducted in the discounting of a note or 
bill payable, when the note is paid or renewed, no cash will be 
paid to cover this interest as Cash has already paid it in advance. 
So the interest item will be covered by a journal entry instead of 
a cash entry, debiting the amount to "Discount and Interest" as 
one of the loss items of the year 1904, and crediting it to "Advance 



ACCOUNTANCY 245 

Interest," thus wiping out this asset item, just as that much of the 
cash item would be wiped out if the interest had not been in 
advance. The account then represents money borrowed from 
cash and so is an asset. 

"Interest Receivable," $325.45, represents money which will be 
paid to us later ; the amount shown has accrued to our credit up 
to December 31, but the time for its receipt has not arrived. The 
amount having been earned during the year 1903 has been credited 
by journal entry to "Discount and Interest" as one of the gains of 
the year and debited to "Interest Receivable," which represents 
the money earned but not yet received. When received it will be 
debited to cash and credited to "Interest Receivable" instead of to 
"Discount and Interest," so wiping out "Interest Receivable" as an 
asset and increasing Cash as an asset to a like amount. Thus it 
does not appear again as a gain item, as it already has been in- 
cluded as one of the gains of 1903. The account then represents 
an asset. 

"Bills Receivable," $7,000.00, represents notes given to us in 
lieu of cash. If received for merchandise, the entries have been 
made in the journal debiting "Bills Receivable," instead of Cash, 
and crediting "Merchandise Sales." When the notes are paid, 
"Cash" will be debited and "Bills Receivable" credited. "Mer- 
chandise Sales" will not be credited then because that account was 
paid by a note instead of cash and received its credit at that time. 
The account then represents cash to be received and so is an asset. 

"Accounts Receivable," $6,745.87, represents merchandise 
which has been delivered but for which neither cash nor notes 
has been received. To get the facts on the books and to repre- 
sent the transactions of the year 1903 in full, the amount due on 
these bills rendered for merchandise sold and delivered, journal 
entries have been made debiting "Accounts Receivable" and cred- 
iting "Merchandise Sales." Thus the profits on these sales are 
represented in Merchandise Sales Account although the cash has 
not yet been received. The account then represents money due 
on account of merchandise sold and so is an asset. This would be 
equally true if it represented services sold. 

"Merchandise Stock," $23,874.25, represents the cost of the 



246 LECTURE NOTES 

merchandise in stock and yet unsold. Before deciding that this 
is an asset to the full amount shown on the ledger, the merchan- 
dise must be inventoried and appraised to determine its present 
market cost as compared with like merchandise which could be 
purchased or manufactured. This is a question at times most 
difficult to solve, and so necessarily great care is required in mak- 
ing the inventories and appraising the merchandise. The result 
is at the best an estimate based upon expert opinion. Here is the 
element of speculation which forces its way into all classes of 
business. The first journal entry shows that in this case I have 
assumed that in "Merchandise Stock" there is a depreciation or 
deterioration of 4 per cent and so $954.97, as 4 per cent of $23,- 
874.25, has been counted as a loss, reducing the asset to $22,919.- 
28. This account well represents how an asset account can be 
found to be in part also a loss account. The same question arises 
as to all asset accounts; even Cash might represent wholly or in 
part a loss by the failure of the bank in which the cash is 
deposited. But in our account keeping we must be governed by 
the probabilities, always being careful to keep on the safe side. 

"Phoenix Gas Bonds," $2,800.00, represents money invested in 
the securities named which have been purchased or accepted in 
trade. The fact that we allow the bonds to be carried on the 
books at $2,800.00 should mean that they can be sold for at least 
that amount. Evidently an asset. 

"Norfolk & Western Railroad Stock," $1,450.00. Same case as 
Phoenix Gas Bonds account. Evidently an asset. 

"Office Furniture and Fixtures," $2,184.27. Similar to the case 
of "Merchandise Stock." Particularly in the case of furniture 
and fixtures it is good practice to depreciate liberally as this is an 
asset which, as second-hand material, can be sold only at a con- 
siderable discount, although its actual value for service may be 
unreduced. In this case I have assumed a depreciation of 5 per 
cent, and so 5 per cent of $2,184,27 has been counted as a loss, 
reducing the asset to $2,075.06. 

"Real Estate," $5,500.00, represents money invested in real 
estate which has been purchased for occupancy or accepted in 
trade. Evidently an asset. 



I 



ACCOUNTANCY 247 

We now come to debit balances which by their titles indicate 
that they are loss accounts. 

"Expense General," $965.88, shows by its title that it carries 
certain of the expenses of the business as indicated by the particu- 
lar scheme of classification. 

"Advertising," $2,000.00, needs no explanation to show that it 
is a loss account or to show the nature of the items covered. 

"Salaries and Wages," $10,600.00, loss account, self- 
explanatory. 

"Salary Bonuses," $500.00, loss account, indicates an account 
into which are charged items of extra salary allowances based 
upon the results secured. 

"Traveling Expenses," $5,675.86, loss account, self-explanatory. 

"Agents' Commissions," $8,764.76, loss account, self-explana- 
tory. 

"Discount and Interest," $845.65. This is intended to indicate 
an account into which interest as a loss is debited and interest as 
a gain is credited. For instance, in the case of "Advance Interest," 
as already explained, "Discount and Interest" will be debited in 
1904 when the asset of 1903, "Advance Interest," is transformed 
into the loss of 1904. Also in the case of "Interest Receivable," 
as already explained, the interest earned for the year 1903 but not 
paid until the next year, was by journal entry credited to "Dis- 
count and Interest" when charged to "Interest Receivable." 
Taking the cases of interest paid on borrowings and received on 
lendings, the transactions being wholly within the year 1903 and 
so cash transactions, the interest paid would be debited to "Dis- 
count and Interest" and credited to "Cash," and the interest 
received would be credited to "Discount and Interest" and debited 
to Cash. The amount to the debit of "Discount and Interest" 
shows that during the year 1903 the interest debits have exceeded 
the interest credits in the amount of $845.65. 

"Store and Office Expense," $4,576.83, indicates by its title that 
it is a loss account. Exactly what items of expense should be 
charged depends upon the particular scheme of classification. 

"Accounts not Collectible," $785.00. Frequently styled "Bad 
Accounts" or "Bad Bills." The debit balance to this account indi- 



248 LECTURE NOTES 

cates that a careful scrutiny of "Accounts Receivable" has shown 
that certain amounts applicable to the year 1903, which had been 
debited to "Accounts Receivable," as before explained, we know 
or believe will not be received, — the accounts are "bad," — and 
so, by journal entries made before the closing entries, "Accounts 
not Collectible" has been debited and "Accounts Receivable" has 
been credited. Another instance of an asset being transformed in 
part to a loss. 

We now come to the accounts on the right or credit side of 
the Trial Balance. 

"Merchandise Sales," $60,650.24. This account has been 
debited with the cost of all the merchandise sold and credited 
with the receipts from these sales, whether the payment has been 
made in cash, notes, or only charged to "Accounts Receivable" as 
already explained. The cost of merchandise not yet sold is 
carried as an esset in "Merchandise Stock" as already explained. 
The balance to the credit of "Merchandise Sales" then represents 
the gross profits from the trading in merchandise, and so is a 
gain account. 

"Erie Railroad Stock," $560.40. This is included to represent 
a profit made in the purchase and sale of a certain number of 
shares of Erie Railroad stock. When the stock was purchased, 
the amount paid was credited to "Cash" and debited to "Erie 
Railroad Stock." When the stock was sold, the amount received 
was debited to "Cash" and credited to "Erie Railroad Stock," and 
the amount received being $560.40 in excess of the amount paid, 
left a credit balance of this amount. This, then, is a gain account. 

We now come to the remainder of the credit accounts, all of 
which will be found to represent liabilities. 

J. E. Thomas, personal, $2,422.63. 

W. L. Sharp, personal, $2,213.36. 

Represent the amounts owing by the firm as a whole to the 
partners as individuals, and therefore represent liabilities. These 
accounts are sometimes known as "Drawing Accounts" as from 
these accounts the partners draw their profits, as distinguished 
from the partners' Capital Accounts, which should always show 
the amount of capital invested in the business by each partner. 



ACCOUNTANCY 249 

These personal accounts show that Thomas has to his credit 
accumulated profits of $2,422.63, and Sharp $2,213.36. 

"J. E. Thomas, Capital," $15,000. 

"W. L. Sharp, Capital," $15,000. 

These accounts show that each partner has put $15,000 into 
the business and that the business as a whole owes to each partner 
$15,000. These accounts then represent liabilities. 

''Interest Payable," $465.00. Represents a condition exactly 
opposite to that of 'Tnterest Receivable." Interest has accrued 
against the firm on account of the year 1903, though the payment 
will not have to be made until the loan is paid some time in 1904. 
To get the item included in the losses of the year, a journal entry 
has been made debiting "Discount and Interest" and crediting 
''Interest Payable" with the interest accrued up to December 31, 
1903, inclusive. Thus the loss is represented in "Discount and 
Interest," and as the loss has not yet been paid it is shown as a 
liability by crediting to "Interest Payable." When the interest 
is paid in 1904, "Cash" will be credited and "Interest Payable" 
will be debited, the loss account of "Discount and Interest" having 
already been debited in showing the losses of 1903. 

"Salaries and Wages Payable," $540.00. The reasoning is the 
same as in the preceding item. By journal entry "Salaries and 
Wages" has been debited with the salaries and wages accrued but 
not due, and "Salaries and Wages Payable" has been credited. 
Thus the amount is included in "Salaries and Wages" as one of 
the losses of the year 1903 and, as a credit to "Salaries and Wages 
Payable," is shown as a liability. 

"Accounts Payable," $2,567.83, represents accounts rendered 
against the firm, say for merchandise purchased, and so repre- 
sents a condition exactly opposite to that of "Accounts Receiv- 
able." In this case, the amount has been covered by journal 
entry or entries, debiting "Merchandise Stock" and crediting 
"Accounts Payable." When the several accounts are paid, "Cash" 
will be credited and "Accounts Payable" debited. Thus 
"Accounts Payable" (liability account) and "Cash" (asset 
account) will be reduced by a like amount. 

"Bills Payable," $4,500.00. The same explanation as for 



250 LECTURE NOTES 

"Accounts Payable," except the merchandise has been settled for 
by the giving of a note or notes. The exact opposite of the con- 
dition represented by "Bills Receivable." 

With the help of these remarks on each of the accounts shown 
on the trial balance, the journal entries can be understood readily 
Posting each of the credit items of the first entry balances each 
of the loss accounts and also reduces the debit balance of "Mer- 
chandise Stock" and of "Office Furniture and Fixtures"; and 
posting the debit items to the debit of Loss and Gain Account, 
carries these losses into this account. Posting the debit items of 
the second journal entry balances each of the gains accounts; and 
posting the credit items to the credit of Loss and Gain Account 
carries these gains into that account. 

Thus all the losses and gains of the year have been consoli- 
dated in the one account, and the separate accounts representing 
losses and gains have been closed for the time, to be re-opened 
with the commencement of the next year's business, to record in 
detail the losses and gains of the year 1904. 

It will now be seen that the Balance Sheet, taken from the 
ledger after thus closing the books for 1903, only shows asset 
and liability accounts. It is here to be understood that the 
credit balance of loss and gain, whether divided to the partners 
or not by subsequent entry, represents a liability to the partners 
or owners of the business. 

The case I have taken as an example is a very simple one. 

It can be seen readily that, in a manufacturing business, the 
accounting and bookkeeping complications are far greater. 

In the case of a large manufacturing concern it would be neces- 
sary to keep the books so that all steps in each branch of manu- 
facture would be clearly represented in the accounts. To this end 
the accounts should be divided and subdivided so that the items 
of cost would be classified to correspond to the proposed analysis 
of costs. A scheme of classification which thus multiplies the 
number of accounts to provide the means for ready and accurate 
analysis of costs may be considered complicated and burdensome 
by the bookkeeping department, and is frequently objected to by 
bookkeepers on that score. It is then to be remembered that in 



ACCOUNTANCY 251 

the case of a large business it pays to so increase the labor and 
expense of the bookkeeping department provided the manager 
and his assistants are thus provided with the facilities for keeping 
themselves constantly informed in the minutest detail of the cost 
of operation and provided they avail themselves of these oppor- 
tunities. For a concern doing a large and diversified business 
nothing could be more inadequate than a condensed classification 
of accounts, for the analysis of costs could then be effected only 
by picking out of these condensed accounts, item by item, the 
information required. 

Only by the development of a completely adequate scheme of 
classification and the rigid adherence to the scheme in the daily 
work can the records of the business be placed before the manage- 
ment in a form to be relied upon, and without this, economy in 
operation cannot be assured. 

In discussing the classification of transactions and grouping of 
accounts I have shown another form of balance sheet based upon 
the equation: 

Assets=Liabilities+Proprietorship 

or 
Assets — Liabilities^:: Proprietorship. 

For greater convenience, I now repeat this form : 



252 



LECTURE NOTES 



Assets : 

% 


Liabilities : 

$ 
























Total Liabilities : 
Proprietorship : 
















Equal Total: $ 


Equal Total: $ 







To complete my discussion of this subject I include a Trial 
Balance, Balance Sheet and Profit and Loss Account (Loss and 
Gain) particularly recommended by Mr. J. Newton Gunn of the 
firm of Gunn, Richards & Co. Mr. Gunn has also been good 
enough to give an explanation of these forms and his reasons for 
adopting them. 

By reason of the instruction already received you are now 
expected to understand how the Balance Sheet and Profit and 
Loss Account are produced from the Trial Balance. Two points 
I draw to your attention. 

In the Balance Sheet and Profit and Loss Account, for greater 
convenience, the debits and credits are shown in the same column, 
the separation being effected by the headings employed. 



ACCOUNTANCY 253 

And the Profit and Loss Account is shown for the month of 
June in addition to the year ending June 30. 

The Balance Sheet 

A Trial Balance taken from the private ledger of a small manu- 
facturing company is shown below. 

A Balance Sheet and Loss and Gain Account of this same com- 
pany is shown in order to make clear the essential difference 
between a Trial Balance and a Balance Sheet. 

A Balance Sheet is an orderly presentation of the accounts of 
a company or undertaking to present to its executives, its share- 
holders, or creditors, its financial condition. 

A great difference of opinion exists between accountants and 
executives as to the best way of presenting the essential points 
in the finances of an undertaking. 

A Balance Sheet has been prepared from a Trial Balance first 
given in a form which is believed to represent the best modern 
practice, to facilitate reference to the several accounts. 

Numbers of the accounts have been annexed, namely Al, A2, 
Bl, B2, etc., to facilitate reference only. 

The assets or resources of the corporation have been arranged 
in order of availability in case of liquidation or for its ordinary 
operation. Its liabilities or debts have been arranged in the order 
in which these obligations must be met in point of law, or prob- 
able necessity of payment in event of liquidation. 



254 LECTURE NOTES 





Trial Balance 








June 30, 1911 






Cash, 




$ 3,500 00 




Accounts Receivable — Customers, 


14,000 00 




Accounts Receivable — Personal, 


500 00 




Notes Receivable, 




2,000 00 




Supplies, 




2,000 00 




Material, 




8,000 00 




Product in Process, 




15,000 00 




Finished Product, 




5,000 00 




Real Estate, 




6,000 00 




Buildings, 




14,000 00 




Machinery and Tools, 




3,000 00 




Patterns and Drawings, 




1,000 00 




Furniture and Fixtures, 




500 00 




Patents, 




4,500 00 




Good will. 




20.000 00 




Advanced Expenses, 




1,000 00 




Accounts Payable— Pay Roll 






$1,500 00 


Purchase 


Creditors, 




7,500 00 


Personal, 






500 00 


Notes Payable, 






6,000 00 


Reserve for Bad Debts, 






700 00 


" Buildings, 






1,400 00 


" " Machinery and 


Tools, 




800 00 


" " Patterns and Drawings, 




400 00 


" Furniture and 


Fixtures, 




200 00 


Capital Stock, 






50,000 00 


Surplus, 






26,400 00 


Sales — Lathes, 






40,000 00 


" Drills, 






25,000 00 


" Accessory Tools, 






15,000 00 


Costs — Lathes, 




$28,000 00 




" Drills, 




20,000 00 




" Accessory Tools, 




12,000 00 




Cash Discounts, 






2,600 00 


Rentals Received, 






2,000 00 


Administrative Expense, 




12,000 00 




Selling Expense, 




8,000 00 





Total, $180,000 00 $180,000 00 



ACCOUNTANCY 



255 



Balance Sheet. 



Date June 



1911. 









Last Month 


Last Year 




ASSETS 


Amounts 














Increase 


[Decrease 


Increase | 


Decrease 




Current: 






















A-l 


Cash 

Accounts Receivable: — 


3,500 


00 














1,500 


00 


A- 2 


Customers 


14,000 


00 














2,000 


00 


A-3 


Other (Personal) 


500 


00 














200 


00 


A-4 


Notes Receivable 


2,000 


00 










500 


00 








Total 


20,000 


00 










500 


00 


1 3,700 


00 




Inventory: 






















B-1 


Supplies 


2,000 


00 










100 


00 






a-n 


Material 


8,000 


00 










3,000 


00 






B-3 


Product in Process 


15,000 


00 










2,650 


00 






B-4 


Finished Product 

Total Inventory- 


5,000 


00 














800 


00 




Total Current 


30,000 


00 










5,750 


00 


1 800 


00 




Fixed and Deferred: 






















C-1 


Real Estate 


6,000 


00 


















C-2 


Buildings 


14,000 00 










2,500 


00 






C-3 


Machinery and Tools 


3,000 00 










200 


00 






C-4 


Patterns and Drawings 


1,000 


00 










200 


00 






C-5 


Furniture and Fixtures 


500 


00 


















C-6 


Patents 


4,500 


00 














1,500 


00 


C-7 


Good will 


20.000 


00 


















C-8 


Advanced Expenses 


1,000 


00 










500 


00 








Total Fixed and Deferred 


50,000 


00 






1 




3,400 


00 


1,500 


00 




Total Assets 


100,000 00 










9,650 


00 


6,000 


00 



256 



LECTURE NOTES 



Balance Sheet. (Continued) 



Date June 30, 



1911. 





UABIUTIES. 


Amounts 


Last Month 


Last Year 






Increase 1 


Decrease] 


Increase | 


Decrease 


D-l 
D-2 
D-3 
D-4 


Current: 

Accounts Payable 

Pay Roll 

Purchase Creditors 

Personal 
Notes Payable 


1,500 

7,500 

500 

6,000 


00 
00 

on 

00 










300 

1,500 

500 


00 
00 
00 


4,000 


00 




Total Current 


15,500 


00 










2,300 


00 


4,000 


00 


E-1 

E-3 
E-3 
E-4 
E-5 


Reserves: 

Bad Debts 

Depreciations:— 
Buildings 

Machinery and Tools 
Patterns and Drawings 
Furniture and Fixtures 


700 

1,40' 
800 
400 
200 


00 

00 
00 
00 
00 










400 

200 

100 

50 


00 
00 
00 
00 








Total Reserves 


1 3,500 


00 










750|00 






F-1 
F-2 


Capital and Surplus: 

Capital Stock 
Surplus 


50,000 
31,000 


00 
00 










4,600 


00 








Total Capital and Surplus 


81,000 


00 










4,600 


» 








Total Liabilities 


100,000 


00 










7,650 


00 


4,000 


00 



ACCOUNTANCY 



257 



Trading and Profit and Loss Account. 



Date June 30, 1911. 





SALES. 


Month of 
June, 1911 


Same Month 
Last Year 


12 Months 
to Date 


Same Period 
Last Year 




Increase 


Decrease 


Increase 


Decrease 


G-l 
G-2 
G-3 


Lathes 

Drills 

Accessory Tools 


3,100 
1,850 
1,050 


00 
00 
00 










40,000 
25,000 
15,000 


00 
00 
00 












Total Sales 


6,000 


00 






1 


1 


80,000 


«,! 










H-1 
H-2 
H-3 


Costs: 

Lathes 

Drills 

Accessory Tools 


2,200 

1,480 

730 


00 
00 
Ou 










28,000 
20,000 
12,000 


00 
00 
00 












Total Costs 


4,410 


00 










60,000 


00 












Gross Profit from Operation 


1,590 


00 








1 


20,000 


00 










G-4 
G-5 


Other Revenue: 

Cash Discounts 
Rentals Received 


185 
166 


00 
66 










2,600 
2,000 


00 
00 












Total other Revenue 


351 


66 




1 






4,600 


00 












Gross Profit 


1,941 


66 










24,600 


00 










i:^ 


Commercial Expense: 

Administrative 
Selling 


1,090 

730 


00 
00 










12,000 
8,000 


00 
00 












Total Commercial Expense 


1,820 


00 










20,000 


00 










K 


Net Profit 


12166 










4,600 


00 











. DEPRECIATION 

Theoretical or Estimated Accruing Depreciation 

V^The Century Dictionary defines depreciation as 

1. The act of lessening or bringing down price or value. 

2. A fall in value; reduction of worth. 

In accountancy the term depreciation is generally employed 
with reference to plant. In that connection it may be defined as 
that reduction in worth caused by wear and tear through use, 
obsolescence, and inadequacy. Unfortunately the term is used 
loosely at times by accountants and frequently so by others. This 
is the more to be regretted because at the best the questions 
involved in the subject of depreciation are most difficult of solu- 
tion. 

A common source of confusion is the failure to recognize that 
as "depreciation" is reduction in worth or value, "repairs," 
"renewals," and "replacements" are things done to repair or com- 
pensate for the losses occasioned by depreciation. 

The repairs, renewals, and replacements currently made may be 
of such volume and cost as to equal the loss by depreciation, and 
so protect the original investment. Thus, in paying for repairs, 
renewals, and replacements, we are in effect paying for deprecia- 
tion. 

In studying the difficult questions involved in depreciation, first 
the facts are to be determined as accurately as is possible under 
the conditions found; then the necessary assumptions should be 
made and clearly set forth ; and, finally, the methods of account- 
ing to meet these facts and assumptions are to be developed. As 
in all matters of business and industrial management, the account- 
ing should be subordinated to the matter to be recorded. This is 
a warning which some accountants need to be reminded of con- 
stantly. 

Another most serious source of confusion and error is the 
failure to recognize that the estimating in advance of the facts 



THEORETICAL DEPRECIATION 259 

the probable and possible future depreciation as the result of 
obsolescence, inadequacy, and physical decay, to be included as 
one of the annual items of operating cost, is a distinctly different 
proposition from determining the actual depreciation which is 
found in the appraisal of a plant in operation. 

The first is sometimes differentiated as theoretical depreciation 
and the latter as absolute or actual depreciation. Certainly the 
term "theoretical" is particularly appropriate to the first class of 
depreciation even if the term "absolute" is not so completely 
appropriate to the second. 

That there is this distinction is a matter which the engineer- 
student needs to appreciate at the very beginning of his study of 
this complex subject, particularly as courts, commissions, and 
some individuals who assume to speak with authority, seem at 
times to be almost or quite incapable of recognizing any differ- 
ence. 

In the first case, — theoretical depreciation, — we are endeavor- 
ing to look into the future in the effort to determine what is to be 
the useful life of each part of the plant under consideration. 

In the second case, — absolute or actual depreciation, — we have 
the facts as to the present condition of the plant, including obso- 
lescence, inadequacy, and physical decay, open to us by inspection. 

I shall first consider theoretical depreciation at some length; 
and I shall not hesitate to repeat myself if, by so doing, I can 
approach the discussion from different points of view. From 
what has already been said, it is apparent that I assume that 
depreciation is to be treated as an item of annual loss and so to 
be paid for out of income. But I do not assume that this disposi- 
tion of depreciation is to be accepted simply on my statement 
to that effect, for I have found that engineer-students (not to 
speak of others who have had the advantages of practical experi- 
ence) find it difficult to understand why depreciation should be 
so treated. 

Unless depreciation of plant, or of any property in which 
capital is invested, is recognized as an item of loss and hence is 
treated as a charge against income, necessarily the capital must 
be impaired to the extent of this "reduction of worth." 



260 LECTURE NOTES 

Suppose a young man without capital is desirous of engaging 
in a business requiring capital — say trading in pumps. A friend 
offers to supply the capital at a certain rate of interest. The 
young man buys 100 pumps and commences to make sales. As 
the pumps are paid for, the money is turned in to the young man's 
cash account, and as demands are made upon his private purse, 
he meets these demands with this money — the total proceeds of 
his sales. 

The stock of pumps he does not renew. 

It certainly requires no argument in this case to show that he 
has spent the profits from the sale of the pumps and also the 
principal intrusted to him by his friend. 

Following this line of thought, it can be seen that each time a 
pump is sold not only must another pump be bought to replace 
the one sold, or enough money be set aside for this purpose, but 
before claiming any profit on the transaction, there must also be 
set aside out of the proceeds from the sale enough to pay the 
pro rata of the year's expenses and of the year's interest to be 
paid to his friend for the use of capital. 

If 100 pumps, alike in character and cost, are sold during the 
year, then before a profit can be claimed there must be deducted 
from the proceeds of each pump the original cost of the pumps, 
plus one one-hundredth of the year's expense plus one one-hun- 
dredth of the year's interest. 
l^It must be apparent after a moment's thought that it is just as 
necessary for the manufacturer to maintain, out of his income, 
the full value of his plant as covered by capital investment as it 
is for the tradesman to keep up his stock of merchandise. This 
is such a self-evident proposition that it hardly seems worth while 
to bring it to the attention of a class of intelligent men. But it 
is because this self-evident proposition is lost sight of in account- 
ing, that certain failures have occurred in the industrial field. 

Probably you are all familiar with the fact that in properly 
conducted concerns engaged in trade — large and small — before 
they make up their statements to cover the results of the year's 
business, they have to take stock, as it is called ; that is, they have 
to go through their stores and warehouses, carefully inventorying 



THEORETICAL DEPRECIATION 261 

everything that is on hand, determining whether the articles have 
depreciated in value, and so finally arriving at as correct an esti- 
mate of the present value of the stock in hand as is possible. If 
the present cost to manufacture or purchase proves to be less than 
the cost as shown by the books of account, the difference {namely 
depreciation) must he charged up as one of the items of loss for 
the year. ) 

This shows that constant care and vigilance must be exercised 
by the accountant or bookkeeper to insure the complete separation 
of the capital or investment items from the income or expense 
items. In the case of an industrial undertaking this matter should 
not be left to an accountant and still less to a bookkeeper ; for even 
an accountant is not qualified necessarily to decide many of the 
questions as to classification of items and especially those involved 
in the distinction between extensions or betterments and repairs 
or maintenance of plant. Frequently a nice discrimination is 
here necessary. In deciding all such questions the conservative 
manager should give the benefit of the doubt to his investment 
accounts and so charge all debatable items to repairs or mainte- 
nance. 

To institute and maintain a scheme of cost keeping, minutely 
subdivided as to the several departments of manufacture, sales, 
and administration, for any degree of accuracy in results, requires 
thorough supervision and cooperation on the part of all depart- 
ment heads. No accountant unaided can secure this accuracy, 
and without it we are helpless in our efforts to obtain efficiency 
and economy of operation. The manager of the plant must, 
therefore, finally be responsible for the accounting. 

Let us now consider in some detail how a plant depreciates. 
^This depreciation may be divided into three classes: 

1. Certain minor parts of the plant break, wear, or become so 
inefficient that they have to be repaired or replaced by new parts. 
These repairs and replacements are paid for out of current income 
and should be charged up as part of the expenses of the year in 
which they occur unless they are covered by an inclusive yearly 
charge estimated to cover all repairs, renewals, and depreciation, 
as later to be explained. 



262 LECTURE NOTES 

2. Certain parts, greater in value, break down or become 
inefficient and they have to be replaced by new parts. These 
replacements may be paid for out of current income and charged 
up directly as part of the expenses of the year in which they occur, 
or the cost may be distributed over a number of years according 
to the number of years the replaced part has done duty ; or they 
can be included in an inclusive yearly charge as referred to in 
connection with No. 3. 

3. But even when all the repairs and replacements as covered 
in 1 and 2 are made, the plant as a whole is not necessarily main- 
tained at its original value, even though it may be from time to 
time thus restored to its original efficiency as far as possible. In 
spite of these efforts to maintain the plant at par value, it will 
gradually age, and there is also the liability of its becoming 
obsolete as to efficiency or inadequate as to capacity. \ 

We, therefore, have to consider the questions involved in the 
final renewal of the plant ; and this accruing liability, which finally 
must be paid for out of income, and so is one of the loss items, 
is what is generally known in accountancy as "depreciation," and 
distinctively as theoretical depreciation. 

This final renewal of plant, which we assume may be made 
necessary by obsolescence, inadequacy, or physical decay, is 
generally spoken of as if the plant were to be rebuilt as a whole 
at some time in the future ; but such would occur only as the result 
of some extra hazard and so is not provided for in the estimate of 
depreciation. Herein is to be found the cause of much of the 
confusion in the minds of some who have discussed this subject. 

In looking into the future, in the effort to estimate the annual 
loss to accrue through "depreciation," the several parts of the 
plant will be accorded widely varying expectations-of-life. I 
shall later explain how the total depreciation is to be estimated by 
grouping the several parts of plant under their respective expecta- 
tions-of-life. 

If we are to keep intact that part of our capital which is 
invested in the plant, we must pay from earnings for the repairs 
and replacements mentioned under Class 1 ; and for the more 



THEORETICAL DEPRECIATION 263 

serious replacements mentioned under Class 2 ; and finally for the 
"depreciation" described under Class 3. 

Having admitted that all maintenance and depreciation charges 
must be met from income, it remains to be determined how these 
losses shall be paid. 

If all the payments made for repairs, replacements, and final 
renewal of plant were to be charged against the earnings of the 
years in which these payments were made, the annual profits 
would show a wide variation. 

Furthermore, if the earnings of any one year, or even the 
average for a limited number of years, were taken as indicating 
the rate of profit, the result might and probably would be most 
misleading. The proprietors of any business cannot afford so to 
deceive themselves. Public utility corporations, subject to the 
rate making powers of public service commissions, for the pro- 
tection of their stockholders must see to it that their accounts are 
so kept as to show all accruing liabilities. 

Then, just so far as is necessary to prevent wide fluctuation^ in 
our operating charges, we must provide in advance for future 
expenditures by setting aside regularly part of our annual income 
to meet these accruing liabilities. 

"Depreciation" is one of the cost or expense items that must be 
treated as an accruing liability. 

Generally the items of current repairs and renewals (Class 1) 
are paid for from current income, and frequently the deferred 
renewals (Class 2) are also cared for in the same way; but there 
still remain the final renewals or depreciation (Class 3), which 
cannot be so treated safely. 

Some accountants claim that the annual expenses — and so the 
profits — are shown more accurately year by year by covering all 
the charges for up-keep of plant (Classes 1, 2 and 3) in a single 
inclusive charge, so making each year bear its share of this loss 
item, no more and no less. If this most desirable result could be 
thus attained, there could be little argument in favor of any other 
system. Those who favor this plan apparently lose sight of a fact 
that should be apparent at once to a practical plant manager; 
namely, that such an inclusive annual charge is determined neces- 



264 LECTURE NOTES 

sarily by an estimate based upon so many conditions, past, 
present, and future, that anything approaching absolute accuracy 
cannot be looked for reasonably. Therefore, in the interest of 
conservative management, it is best to pay currently for current 
repairs and renewals and make a liberal estimate for ''deprecia- 
tion," checking and correcting this estimate year by year as 
changes in conditions are developed. By thus paying currently for 
repairs and renewals as far as we can without varying too 
seriously the annual charge, we reduce the opportunity for error 
in our estimate on "depreciation," an advantage not to be regarded 
lightly. 

Coming now to the items included in Class 2, the case is some- 
what different. These renewals are much more serious in char- 
acter. They are of more occasional occurrence and to charge 
them up to the expenses of the one year in which they occur would 
at times seriously impair the accuracy of the several yearly state- 
ments of loss and gain. 

That is, the year in which the renewal of some large part of the 
plant was paid for would be called upon, in the statement of that 
year's loss and gain, to bear the total cost, while the other years 
which had had the benefit of the service of this part of the plant 
would have been relieved of all cost therefor. These items can 
be included in the estimate to cover "depreciation," or they can 
be cared for separately in a suspense account, which is designed 
to spread the cost over a number of succeeding years as later to 
be explained. The first method is the one more generally 
employed. 

Coming to Class 3, "depreciation" or final renewal of plant, you 
are now prepared to appreciate the need for making some special 
provision from each year's income to meet this accruing loss. 

The first step is to estimate as closely as we can the annual loss 
which may be occasioned by "depreciation." As the basis for 
this estimate we must assume (and it is only an assumption at 
the best) that each part of the plant may need to be renewed 
after a certain number of years. 

In trying to estimate a length of life which we can be reason- 
ably sure will be realized, we have to consider besides physical 



THEORETICAL DEPRECIATION 265 

decay the chances of the plant having to be discarded through 
becoming inadequate as to capacity, or obsolete as to efficiency 
or economy. 

Then, to estimate the probable life of each part of the plant, it 
is necessary to take into consideration the class and character 
of plant; its design and construction; its capacity; the way in 
which it is operated; the present volume of business and pros- 
pects as to the future; whether it is overworked or not; 
whether it is kept in good repair; and whether the cost of the 
repairs is charged year by year against the profits. In esti- 
mating the expectation-of-life of plant we have therefore to take 
into consideration questions of accounting as well as questions 
of design, construction, operation, and maintenance of the plant 
itself. 

Each part of the plant should be considered separately, and 
taking advantage of our own experience and that of others, and 
bearing in mind the special conditions already referred to, we 
should determine upon a safe expectation-of-life for each part 
of the plant. Even to secure a result which may be accepted as 
reasonably safe requires the best judgment of an engineer 
experienced in the construction and operation of the particular 
plant under examination. 

Having thus assigned an expectation-of-life to each part of 
the plant, the several parts are to be grouped under the years so 
assigned. Thus all parts given a ten years' life will be grouped 
together, those of fifteen years will be grouped together, etc. 

Bearing in mind that the purpose is to determine the annual 
cost of depreciation to be included as one of the loss items in 
the Loss and Gain Account, the expectation-of-life table should be 
made thoroughly conservative while having in mind the chances 
of the particular plant under examination becoming obsolete or 
inadequate in addition to the chances of physical decay. 

In making this life-expectation estimate, as I have said, we 
may avail ourselves of the experience of others. But here we 
should be slow to accept the guidance of any of those whose 
qualifications have not been proved. Especially we should regard 
with suspicion the advice of those who are only theorists and who 



266 LECTURE NOTES 

attempt to estimate depreciation by rules and tables intended for 
general application. It may be excusable in an accountant with- 
out practical experience to assume that he can estimate the annual 
charge for depreciation by means of a life table which shows, for 
instance, that a steam power plant has a certain life, an electric 
light plant a certain other life, a gas plant still another life, etc. 
But this is inexcusable on the part of a man who has had practical 
experience and is endowed with even a moderate amount of 
common sense. To assume that certain kinds of apparatus and 
machines can each be given definite life-expectations, without 
regard to the special conditions involved, is quite indefensible. 
And yet you must expect to be asked. What is the life of a boiler? 
the kind of boiler not even specified. What is the life of an 
engine? What is the life of a gas holder? What is the life of 
a cast-iron main? If you endeavor to explain why such general 
questions cannot be answered, you will very likely be accused 
either of ignorance or evasion. 

This inability on the part of those in positions of authority to 
understand that no such general rules and tables can be established 
for their guidance is bad enough in connection with the making 
of estimates to cover future depreciation, but, as I shall later 
show, it is much worse in the case of estimates of actual deprecia- 
tion as an element to be considered in the appraisal of present 
value of plant. 

y^Suppose an expectation-of-life table is to be made up for two 
plants of the same general character, one of which was well 
desig led as to efficiency and capacity, well constructed of the best 
materials, operated within its capacity, carefully kept in repair, 
working parts renewed while having in mind correction of obso- 
lescence and inadequacy as far as possible; and the other plant 
poorly designed, poorly constructed, worked beyond its capacity, 
and not even kept in repair. This comparison only needs to be 
stated to show that no general life table is applicable to both plants. 
And yet no two plants of the same general character, as for 
instance two gas works, can be found in which there will not be 
marked differences in one or more of the elements referred to. 
Having examined each part of the plant and assigned a life- 



THEORETICAL DEPRECIATION 267 

expectation for each part, and having so developed a table of life- 
expectations, it should be assumed for the purposes of this esti- 
mate that at the end of each life period covered by the table the 
parts of plant included in each group will have to be renewed. 
Although in the interest of conservative management we must be 
governed by the assumption so made, it does not by any means 
follow that the several parts of plant will in fact have to be 
renewed at the end of the respective periods assumed, because 
many things may happen to change the estimate, especially 
in connection with obsolescence and inadequacy. As we should 
be careful to make the life estimates on the safe side, we may hope 
for longer lives than those assumed. If, as to any part, we have 
underestimated the element of inadequacy and we find the plant 
wholly or in part inadequate as to capacity before the expiration 
of the assumed life, we at least have the unexpected higher rate 
of increase in sales to compensate for the necessity of renewing 
plant in advance of our estimate. It may be in such a case that 
the investrnent of additional capital will be found to be fully 
warranted. ) 

Before proceeding to construct an expectation-of-life table as 
the basis for an estimate of accruing depreciation, it must be 
determined what portion of the renewals shall be included with the 
repairs and so paid for out of current income. Certainly it will 
simplify our calculations to so provide for the minor repairs and 
renewals which I have assigned to Class 1. The more important 
renewals assigned to Class 2 can be taken care of from current 
income or can be included in the estimate to cover accruing 
depreciation. Class 3. If these more costly renewals are recurring 
year by year or nearly so at about the same cost, as might well be 
the case of the retorts and settings of a coal gas "bench," the dis- 
tribution of this loss item takes care of itself with a fair degree 
of uniformity, and so we need not include such items in Class 3 in 
estimating accruing depreciation. Strange as it may seem at first 
thought, the parts of plant which have the shortest lives are the 
ones which occasion the least trouble in computing accruing 
depreciation, for the reason that the facts are soon known and 
provision can be made for them from current income, particularly 



268 LECTURE NOTES 

when plant of this class of about the same value has to be renewed 
each year. Take for instance the poles of a telephone company or 
the ties of a railroad company. Under known conditions as to the 
kind of wood, whether treated or untreated, the kind of soil, etc., 
a close estimate can be made of the life of these parts of the plant. 
If, for instance, it were found that the average life of a certain lot 
of poles was ten years, and if the construction had so extended 
over a certain number of years that one tenth of these poles could 
be renewed advantageously each year, there would be no need to 
include that plant group in the depreciation scheme, for the annual 
payments for renewals made from income and charged to loss 
and gain would keep that portion of the plant up to par. While 
there would always be some depreciation in the existing poles, the 
annual renewals would keep the poles constantly up to a uniform 
efficiency. At the end of a hundred years the pole line covered by 
such a system of renewals should be as sound and efficient as at 
the end of the first ten years. 

Take another case, the consumers' meters of a gas company. 
Suppose that the repairs, renewals of working parts, and condem- 
nations of wornout meters is a continuous process ; and that by 
experience it has been determined that if all the meters are thus 
conscientiously and competently examined, tested, repaired, and 
renewed as required, once in every five years, the complete circuit 
of all the meters being thus made every five years, the meters as a 
whole will be maintained constantly at a practically uniform 
condition as to efficiency. Now if the annual cost of all of this 
work and also of the meters purchased to replace the condemned 
meters is charged up as one of the items of operating cost, then 
there is no accruing depreciation on this portion of plant and so 
consumers' meters can be disregarded in making up the expecta- 
tion-of-life table. By the current expenditures under such a 
system the depreciation loss is spread over the years with 
practical uniformity, much more so probably than in the case of 
the parts of plant included in the expectation-of-life table. A 
little thought should convince (though it fails to do so apparently 
with some experts) that at any time the meters will be found of 
the same physical efficiency and worth provided this scheme of 



THEORETICAL DEPRECIATION 269 

repairs, renewals, and condemnation has been faithfully and com- 
petently maintained. Inadequacy is not likely to interfere with 
this scheme because a meter found to be too small for one 
customer can be used for another. As to obsolescence, a com- 
parison of the design and construction of meters made fifty years 
ago with those made to-day, warrants the belief that there is not 
much to be feared from this cause. 

I am giving these as examples of plant that can be maintained 
fully by current repairs and renewals. 

While referring by way of example to gas plant, I will con- 
sider the item of cast-iron mains. In most soils cast-iron pipe, 
unless acted upon by electrolysis set up by stray currents from 
electric power plants, will last almost indefinitely. In exceptional 
soils the life is shortened. The outside of the pipe takes on a 
coat of rust, or rust and soil, which, appears to protect the iron 
from further corrosion. On the inside the pipe is protected by 
the condensible hydrocarbon vapors of the gas. 

I have myself examined carefully pipes which have been down 
fifty years and, as far as the quality of the iron was concerned, 
there seemed to be no impairment. Of course, it is quite possible 
that disturbances of the bed on which the pipes lie, due to the 
digging up of the streets for sewers and the like, might greatly 
impair the pipes ; but this in the case of a well-conducted company 
might rather indicate that there was no necessity for including a 
yearly charge for depreciation because these troubles would have 
been cared for from time to time and the repairs would have 
been paid for out of the current income. In such a case it is quite 
possible that at the end of five, ten, fifteen, twenty or twenty-five 
years the main system in general might be in more effective con- 
dition for economical operation — that is, the delivery of gas 
without leakage — than when first laid. The weaknesses, as they 
made themselves evident, should have been corrected and the 
cost paid out of current income. This serves again to point out 
that in making up an expectation-of-life table it is necessary to 
examine, not only the conditions as to the plant itself, but the 
conditions as to the accounting methods followed. 

In the case of cast-iron mains I do not mean to have it under- 



270 LECTURE NOTES 

stood that no provision should be made for accruing depreciation. 
A cast-iron main is not likely to become obsolete, although in 
the last twenty years other kinds of pipe have been suggested as 
designed to drive the bell and spigot cast-iron pipe out of use. 
There is far more chance of certain portions of the main system 
becoming inadequate. All of these chances have to be considered 
and so provision to cover possible accruing depreciation should 
be included in the expectation-of-life table and the estimate based 
thereon to cover "theoretical" depreciation. 

I have referred to electrolysis as a disturbing element in our 
estimate. In many parts of the country gas mains and still more 
water mains, are being damaged by stray electric currents and 
this must be provided for in the depreciation estimate. Unfortu- 
nately, it is extremely difficult to estimate what may be the 
possible loss even though competent electrolysis surveys have 
been made. One thing we have as an offset — a claim against the 
company responsible for the damage. 

It may be well to point out here that the case of cast-iron pipe 
as used for gas is very different from the case of the same pipe 
used for water. In the latter case it is the practice to coat the 
pipes inside and out with tar; some engineers are of the opinion 
that the coating is necessary or an advantage even on the outside 
of the pipe. The real advantage, however, is that it prevents 
oxidation on the inside of the pipe, for the water passing through 
carries with it more or less oxygen from the air; oxidation 
results; the pipe is reduced in thickness, because the scale as 
formed is carried forward by the push of the water, thus depre- 
ciating the pipe and developing a continuing trouble in connection 
with the operation of the plant, due to the scale being deposited 
in valve seats and the like. 

So in the case of cast-iron water mains we are warranted in 
expecting less depreciation on the inside if they are coated before 
they are laid. But with gas mains the tar coating is a distinct 
disadvantage. Not only is it not needed for protection, as 
explained, but the tar deposited on the outside of the spigot ends 
and the inside of the bells is attacked and dissolved by the hydro- 
carbons of the gas, and so these two tar films which are included 



THEORETICAL DEPRECIATION 271 

in the caulked joint are cut away and leakage results. So definite 
is this fault that experienced gas engineers only accept tar-coated 
cast-iron pipe when they find it impossible to obtain the uncoated 
pipe to meet an immediate demand, and in these cases they are 
careful to burn off all the tar from the spigots and bells. 

The conditions in regard to service pipes are quite different. 
These are generally made of wrought-iron or wrought-steel. In 
many kinds of soil, unless the pipe is thoroughly protected by an 
applied coating, the wrought-iron oxidizes more rapidly than the 
cast-iron, and the wrought-steel oxidizes more rapidly than the 
wrought-iron. Here again we have to take into account the 
degree of thoroughness with which the plant is maintained and 
the methods followed in the accounting department. If the 
services originally installed were of uncoated ''black" pipe; and 
if year by year the services have been renewed when found 
defective; and if, learning from experience, the management has 
replaced the old uncoatted pipes with pipes protected by a 
thoroughly effective coating ; then this part of the plant may be in 
better condition for efficient and economical service than it was 
years before when uncoated pipe only was used. Furthermore, 
if the renewals have been charged to operating cost, as they 
should have been, the value under appraisal should at least sup- 
port and perhaps exceed the book value. 

Again, certain parts of the plant under investigation, other than 
those to which I have referred, might be found to need renewal 
on the average, say, every five years; and it might be that some 
of these parts would need renewal one year, and some the 
next, and so on. Then it might be that the cost of renewal of 
these parts of plant would be distributed not too unevenly over 
the five years' life period. If now these renewals are charged up 
to the operating cost of the year in which they are made, they 
should not be considered in the estimate upon which the expecta- 
tion-of-life table is made up. Here, then, is an item which, 
because of its short life, might appear to be a most important 
element of accruing depreciation, but which, upon further con- 
sideration, we see is properly disregarded because it has already 
been cared for in repairs and current renewals. ^ 



272 LECTURE NOTES 

I have given these few practical examples to show that it is 
the evidence of ignorance or inexperience for anyone to stand 
off at a distance, without examining the plant and the systems of 
maintenance and accounting, and attempt to apply expectation-of- 
life tables to determine the reduction in plant value due to 
depreciation. 

Certainly I have said enough to show that the problem of 
estimating accruing depreciation is a most difficult one to solve 
even by the man who, by training and experience, is an expert. 
It follows that we should be prepared to amend our estimate from 
year to year as we have the opportunities to check up the correct- 
ness of the assumptions upon which we have based our estimate. 
Then again it follows that all the details of depreciation estimates 
should be recorded fully and exactly, so that as conditions 
change we or those who follow us may always be able to compare 
the results of the estimates with the facts as found. 

Here, as with every record, especially in accounting, the state- 
ments should be completely self-explanatory. The failure to 
follow this simple rule is the cause of great waste and inefficiency, 
far more so than any one can appreciate who has not had bitter 
experiences of his own. 

Now let us assume that a plant has been surveyed carefully in 
detail, and, having in mind all possibilities of accruing deprecia- 
tion through obsolescence, inadequacy, and physical decay, each 
part of the plant has been assigned a certain expectation-of-life, 
eliminating from the estimate those parts which are completely 
maintained by current expenditures for repairs and renewals. 

In considering the three elements named, it may be that the 
conditions found will indicate that one of the three threatens to 
so shorten the life of certain parts, that only this one element 
need be considered in the final judgment as to expectation-of-life. 
For instance, it may be that a certain part of the plant is found 
to be in excellent physical condition and of a capacity indicating 
adequacy for many years, but some recent change in the art 
threatens to make it obsolete in the near future. Or, the part 
may promise well as to physical condition and obsolescence, but be 



THEORETICAL DEPRECIATION 273 

of such inadequate capacity as to indicate the necessity for aban- 
donment on this score in the near future. 

Having so assigned an expectation-of-life to each part of plant 
which is not completely covered by current repairs and renewals, 
the several parts with their costs should be grouped in a table, 
each part according to its respective expectation-of-life. A 
further important condition should be introduced by estimating, 
as to each part of plant included, a salvage value to be deducted 
from original cost. A study of the plant and controlling condi- 
tions must determine whether the salvage assumed shall be 
based upon junk value, or upon service value as determined to 
meet less exacting conditions. Especially in the electric business 
the junk value of certain parts furnishes an important salvage 
value. It is fair to expect that with most parts of the plant there 
will be some residual value at the time of abandonment — in 
some few cases there may be none. 

Let us now assume that, after deducting for estimated salvage, 
the net cost of those portions of the plant which are not com- 
pletely covered by current repairs and renewals, and which 
therefore have to be included in the estimate of "theoretical" or 
accruing depreciation, is $500,000 ; and that the several parts can 
be grouped as shown by the following simple table. 

ExPECTATION-OF-LlFE TaBLE 



Groups 
of Parts 


Expectation-of-Life 
in Years 


Net Cost 
in Dollars 


A 




10 


$25,000 


B 




15 


50,000 


C 




25 


100,000 


D 




35 


150,000 


E 


Total net cost, 


50 


175,000 




$500,000 



The first question is. What is the estimated annual depreciation 
which, according to this table, is to be included as an annual loss 
item ? 



274 



LECTURE NOTES 



If parts of plant costing as shown are, according to our con- 
servative estimate, to be renewed respectively at the end of the 
years shown, the annual charge to loss and gain will be 



For A 


$25,000-^10 


=$2,500 


For B 


50,000^15 


== 3,3331/3 


For C 


100,000-^-25 


= 4,000 


For D 


150,000-^-35 


^ 4,285% 


For E 


175,000^-50 


= 3,500 



$500,000 Annual charge $17,619 

It may be convenient to have in mind what per cent of the 
total net cost of plant the estimate indicates should be withdrawn 
each year from income to cover accruing depreciation. 

This is found to be $17,619^5,000=3.524%. 

The question is often raised as to what is the "average life" 
of a plant. I am reluctant to include anything in these notes that 
can be taken as indicating that the average life of a plant can be 
determined in advance of the facts. Certainly no figures can be 
used for general application to determine the "average life" of 
any plant, for the reasons already given at length. 

But under the conditions already named, if the expectation- 
of-life of the several parts is estimated to be as shown by the 
table, the estimated average expectation-of-life for the whole 
plant will be 

$500,000^17,619=28.378 years 

This division is carried out to three decimal places because I 
wish later to make certain comparisons in connection with the 
sinking-fund treatment of depreciation. As far as the estimated 
"average life" is concerned, the fractions of a year are not of 
moment in view of the many assumptions which enter into the 
estimate. 

As long as the "average life" enters so largely into the compu- 
tations of accountants and others in estimating depreciation, it 



THEORETICAL DEPRECIATION 275 

may be well to point out here an error which is sometimes made 
in calculating the "average life" from such a life table as I have 
shown, as follows: 



Years 

10 multiplied by 
15 multiplied by 
25 multiplied by 
35 multiplied by 
50 multiplied by 


Cost of parts 
in dollars 

$ 25,000 

50,000 

100,000 

150,000 

175,000 


= $ 250,000 
r=r 750,000 
= 2,500,000 
= 5,250,000 
= 8,750,000 




$500,000 


$17,500,000 



$17,500,000^500,000=35 



and thus the "average life" is calculated erroneously to be 35 
years. 

It is only because this error has occasioned trouble that I take 
the time to refer to it. Presumably those making the mistake 
do so because they fail to see the difference between this deprecia- 
tion problem and, by way of example, the average of the weights 
of certain castings. For instance, if we had 25,000 castings 
weighing 10 pounds each; 50,000, weighing 15 pounds each; 
100,000, weighing 25 pounds each; 150,000, weighing 35 pounds 
each; and 175,000, weighing 50 pounds each; the average 
weight of these castings would be 35 pounds. 

But if in this way we desire to calculate the average life from 
our estimated expectation-of-life table, we must state our proposi- 
tion so as to include all the dollars involved in the full fifty years 
period. For example, during the fifty years period, according to 
our estimate, we have to renew Parts A, $25,000, five times, for 
they have to be renewed every ten years ; Parts B, $50,000, we 
have to renew three and one third times ; and so on. 

The following table shows the full computation : 



276 LECTURE NOTES 



Years Cost of Times Total Dollar Years 

parts renewed requirement 

in dollars in 50 years in 50 years 

(a) (b) (c) (d) 

Col. (b) X Col. (c) Col. (d) X Col. (a) 

10 $ 25,000 5 $125,000 $1,250,000 

15 50,000 3% 166,666% 2,500,000 

25 100,000 2 200,000 5,000,000 

35 150,000 1% 214,285% 7,500,000 

50 175,000 1 175,000 8,750,000 



$500,000 $880,952 $25,000,000 

Dividing the total dollars years by the total dollars to be pro- 
vided in the fifty years period we have for the "average life," 
$25,000,000-^880,952—28.378, as before found. 

Having satisfied ourselves that in view of all conditions found, 
we have estimated the accruing depreciation to the best of our 
ability and especially being satisfied that the estimated annual 
charge is reasonably large enough to cover all contingencies, the 
next question is. How shall the amount so retained each year 
from income be financed to compensate for this impairment of 
capital, definite as to the fact but indefinite as to extent? This 
is a question quite apart from the problem of estimating the 
amount to be annually charged. 

In the United States the amounts so withdrawn from income 
to cover accruing depreciation, over and above the amounts 
required year by year to cover current repairs and renewals, 
generally have been invested in extensions and betterments to 
meet the developing requirements of the undertaking. Provided 
this method is followed advisedly, there can be no objection to it 
in the case of a company constantly requiring additional capital 
to meet demands for increase in plant. 

If in a sinking fund scheme, as later to be explained, we can 
only calculate upon an average compound interest rate of 4 per 
cent, and we can earn on the depreciation fund an average of 
5 to 10 per cent in our own business, it seems to be in the interest 
of true economy to invest the depreciation fund in plant provided 



THEORETICAL DEPRECIATION 277 

there is a legitimate demand for such extensions. In practically 
every industrial concern in which I have been interested, this 
demand constantly exceeded in amount the depreciation fund. 
I shall discuss this portion of our subject more at length after the 
sinking fund method has been considered. 

Of late years, and especially in connection with commission 
control of public utilities, the question of "depreciation" has 
received much attention in this country. In the minds of our 
amateur and professional reformers there seems to be a conviction 
that before they entered upon the scene, this important matter 
had been lost sight of or deliberately disregarded by managers 
of industrial properties. Nothing could be much farther from the 
facts as to general practice. It is too true that in a number of 
cases which came prominently before the public on account of the 
disastrous results of bad and dishonest management in this and 
other connections, accruing depreciation was neglected and 
renewals of plant, which should have been covered from income 
at least in part, were paid for by the issue of additional capital 
securities. 

It is also true that in many cases no specific effort was made to 
estimate the accruing depreciation, but the managers of industrial 
properties at the end of prosperous years after paying the regular 
dividend, charged up the part or whole of the surplus earnings 
to Loss and Gain Account, crediting the same to Plant Account. 

In considering accountancy as applied to depreciation, we shall 
see that this process, while more or less haphazard, was a com- 
plete protection against impairment of capital provided the 
amounts so charged against income were sufficient in amount and 
provided no additional capital securities were later issued against 
these depreciation charges. Let it here be noted particularly I am 
now referring to the cases where the income was sufficient to pay 
all expenses, including depreciation, and also a fair return on the 
investment. 

That there may be no misunderstanding on a question of vital 
importance, let me here point out a distinction. 

If the amounts withdrawn from income and charged against 
depreciation are found or believed to be no more than sufficient 



278 LECTURE NOTES 

to cover accrued and accruing depreciation, no surplus has been 
accumulated and so no warrant for the issuance of additional 
capital obligation has been established. 

On the other hand, it is entirely legitimate to represent increase 
in actual value by addition to capital obligations provided it can 
be demonstrated that the amounts charged for depreciation have 
been more than sufficient to keep plant value up to par. In other 
words, if the actual value of property is found to exceed the 
''book (ledger) value," the stockholders have a clear title to this 
additional property quite as much as they had to the original 
property, and so theirs is the right to have this additional value 
represented by the proper evidences of ownership if they wish to 
have these evidences in more expanded form. Such a state of 
aflfairs indicates that the company's net earnings have not been 
all paid out in dividends, but part have been reinvested in the busi- 
ness for the benefit of the proprietors. This last is practically 
what has been taking place in all well-managed, prosperous con- 
cerns, whether the surplus so earned has been represented later 
by additional capital obligations or not. The question as to what 
extent such surplus earnings shall be represented by additional 
capital obligations is a matter of business judgment. 

I have found that certain students of economics, who pose as 
reformers, find it difficult to understand or believe that in many of 
our industries depreciation has been generally covered sufficiently 
by the methods I have just briefly described, and that as a result 
many of our great industrial properties and railroads have little 
or nothing to fear from a physical appraisal except the expense 
involved, the tremendous difficulties to be overcome in many cases, 
and the well-grounded fear of incompetency or prejudice on the 
part of those in charge of the work. My own experiences in con- 
nection with the examination and appraisal of industrial properties 
convince me that generally the conditions in this respect are much 
better in the United States than is popularly understood or is even 
understood in many cases by those most directly concerned. I 
take this opportunity to record the opinion that certain of our pro- 
fessors of economics, engaged in directing the studies of the youth 
of the nation gathered together in colleges and universities, will 



I 



THEORETICAL DEPRECIATION 279 

before many years find it necessary to revise their lecture notes on 
this question. 

i This is a good place to point out that we have no right to expect 
that all depreciation, especially that due to obsolescence, shall 
necessarily be a charge against income. If, from the first, a strict 
scheme for charging all depreciation against income had been en- 
forced against electric light and electric railway undertakings, 
the extraordinary advances in the art which have enabled these 
industries to minister in such marked degree to the convenience 
and comfort of mankind, could never have been made. Additional 
capital had to be supplied constantly to replace obsolete apparatus. 
Replacements of this kind followed each other in rapid succession. 
To ignore these facts and now to allow these undertakings only 
the reproduction cost less depreciation of the existing plant, would 
in effect work confiscation. In other words, there are certain 
losses involved in the development of a new industry, and even of 
a new business, which are legitimate charges against capital. As 
we come to consider * 'overhead charges" in connection with the 
study of specifications and estimates, this point will be developed 
further. This is a matter which must be considered even in the 
appraisal of physical properties. As the construction of all 
physical properties has been subject to the losses necessarily 
involved in the imperfections of the human agents who have 
designed and constructed these properties, in appraising a prop- 
erty spread out before us, we have no right to ignore the omis- 
sions, contingencies, and mishaps which necessarily have been 
included in the construction of every plant which has been put 
into operation. We have a right to demand that good average 
ability and care shall have been exercised in their design and con- 
struction — certainly we have no right to demand perfection in 
human agencies. When we find in construction or operation a 
result above the average, due to efficiency above the average in 
the human agencies, the credit and the profit for this higher 
degree of efficiency and economy should be credited, at least in 
part, to those who, as courageous investors and competent engi- 
neers and managers, have secured this result. While a wise 
scheme of management will accord to the buyer a participation 



280 LECTURE NOTES 

in the increased earnings so obtained, fairness to the management 
and the proprietors demands that some of the advantages should 
be retained for the benefit of those who have made possible this 
decreased cost to the buyer. ) 

We now come to the consideration of the sinking-fund method 
of financing "depreciation." For illustration I shall use the same 
expectation-of-life table as before. 

Under this plan the cash has to be withdrawn each year from 
income and set aside to accumulate at compound interest, so that 
principal plus interest accumulations will, at the end of the several 
life periods, equal the original cost of the respective plant groups. 
And here, for simplicity, we should consider each group. A, B, 
C, D, and E, as covered by a separate and distinct sinking fund, 
as will appear later. 

To determine what rate of compound interest it is safe to 
assume as being obtainable through a long series of years, requires 
the trained judgment of the banker; and here again, the result is 
only an estimate founded upon an educated judgment. Having so 
assumed a rate of interest, we come to the sinking fund calcula- 
tions. This is rather the specialty of the actuary. Finally we have 
to place the results upon the books of account, and here we are in 
the realm of the accountant. This last part of the subject will be 
treated separately so as to cover several methods of financing. 

We will assume that the interest is to be received and com- 
pounded yearly. It is probable that the interest might be com- 
pounded half yearly, but the principle is the same and the treat- 
ment is somewhat simpler if we assume compounding at the end 
of each year only. 

If we set aside each year for n years a constant number of 
dollars to accumulate at compound interest, we have a geomet- 
rical progression. It may be convenient if we are reminded that 
a geometrical progression is a series of numbers each derived 
from the preceding by multiplication by a constant factor. As 
annuity tables are not always at hand it may also be convenient 
if we are reminded of the equation and its derivation. This ele- 
mentary discussion will be of value also in connection with 
some of the points to be considered. 



THEORETICAL DEPRECIATION 281 

Let A be the annual payment into the fund ; 

r, the constant factor, namely 1, plus the rate of interest 

expressed as a decimal fraction; 
n, the number of terms or years during which the payment 

is made into the fund; 
S, the sum of n terms or payments. 

The first payment, A, will be made at the end of the first year. 
At the end of the second year this first payment will have been 
increased by interest accumulation to Ar; at the end of the 
third year this will have been so increased to Ar^ ; at the end of 
the fourth year to Ar^; and at the end of the nth year to Ar^'^ 
The second payment, A, with one year less of interest accumula- 
tion, will in the same way have been increased in n years to 
Ar"'^; the third payment to Ar^'^. The last payment, made at 
the end of n years, will have had no time to accumulate interest 
so it will be A, the next to the last with one year's interest will 
be Ar, the second from the last, Ar^, and so on. 

So we have as the sum of these payments : 

1. S=A+Ar+Ar2+Ar3+ .... ■+Ar^-2+Ar^-2+Ar"-\ 

Ar"""^ being the first payment into the fund, and A the last 
payment. 

Multiplying by r we have 

2. Sr=Ar+Ar2+Ar3+Ar^+ .... +Ar^-2+Ar^-i+Af^. 
Subtracting No. 1 from No. 2 we have 

S(r— l)=A(r^-l). 



S=A 



r^-1 . ^ r-1 



r-1 



• ^=s -^ 



In solving for A, the annual payment, we can let S be the total 
amount, and so find the total amount of plant cost, or we can let 
S equal 100 or 1, and so find A in terms of per cent of plant cost. 

With this equation let us determine the amount to be set aside 



282 LECTURE NOTES 

each year to compound annually at 4 per cent interest to redeem 
the cost of parts in group A, $25,000, in 10 years. 

A=^5000 ig^^ 

The 10th power of 1.04 can be found by logarithms or com- 
pound interest tables, as given in Kent's and other pocket books, 
or in arithmetic text-books, these tables also serving as tables of 
powers. For instance, referring to the 4 per cent column, the 
first year shows 1.04; the second year 1.04X1.04=1.0816; the 
third year 1.0816X1.04=1.124864; and the tenth year 1.480244. 
A table conveniently arranged for this purpose is appended to 
these notes. 

ThenA=25000 ig^^i^g^^osa 

Then an annual payment of $2,082, compounding annually at 
4 per cent, will produce in ten years $25,000. 

Our determination will be adapted better to general application 
if S is taken to equal 1 or 100. 

Letting S=l, we have A=l „!„" =.0833. 



S=100, we have A=100 ^ \ , =8.329. 



1.04-1 
1.04^°— 1 



25000X.0833, or 250X8.329=2082 

Applying this last method to the entire expectation-of-life table 
we have : 

Part A, 10 years, A=100 - ^^'q^^o~\ =8.33 per cent. 
Part B, 15 years, A=100 q.is^-, =4.99 per cent. 



Part C, 25 years, A=100 ^ '^ ^^' ^ =2.40 per cent. 



1.04- -1 
1.04^5-1 



THEORETICAL DEPRECIATION 283 

Part D, 35 years, A=100 l'^t^\ =1.36 per cent. 
Part E, 50 years, A=10Q I'^tT^. =Q'^6 P^r cent. 

For a better understanding of the principles involved, having 
thus obtained from the formula the per cent of cost of each part 
of plant to be set aside in a 4 per cent sinking fund, we may now 
refer to tables which will give these values directly. 

These tables for quite a wide range of interest rates and years 
are to be found in life insurance annuity tables, in engineers' 
pocket books such as Kent's, in Matheson's "Depreciation of Fac- 
tories," etc. 

A table conveniently arranged and carefully checked, giving 

r— 1 
per Cent values of A in the equation A=:S-^^ — -, r being given for 

1.025, 1.03, 1.035, 1.04, 1.045, 1.05 and 1.06, and n being given 
for every year from 1 to 100 inclusive, is appended to these notes. 
The results are only carried to the second decimal place, which is 
quite sufficient for the work in hand. If for any special purpose 
a more accurate determination is required, the equation can be 
solved by logarithms. 

It is to be noted that these annuity tables are based upon differ- 
ent values for S. Life insurance and Kent's annuity tables give 
the amounts required to redeem $1,000 ; Matheson's gives S=£l ; 
my table gives S=$100. It seems worth while in the interest of 
accuracy and efficiency to point out these differences when we find 
bookkeepers and others who are constantly dealing in figures 
placing in a column with the heading "per cent" the figure .02, 
intending it to mean 2 per cent. Even with engineer-students it 
may not be amiss to remind them that the placing of a decimal 
point is a matter of importance in all computations, and may be 
a matter of the gravest moment. 

We are now prepared to develop our expectation-of-life table by 
the assistance of the table page 570, and so determine the total 
annual payment to be made to the 4 per cent sinking fund. 



284 



LECTURE NOTES 



Groups of parts 
of plant 


Expectation-of- 
lif e in years 


Cost of plant 
groups. 
Dollars 


Per cent 

required to 

redeem 


Amount to be set 
aside each year 
for each group 

and total dollars 


A 
B 
C 
D 
E 


10 
15 
25 
35 

50 


25,000 
50,000 
100,. 00 
150,000 
175,000 


8.33 
4.99 
2.40 
1.36 
0.66 


2,082. 
2,495. 
2,400. 
2,040. 
1,155. 


Totals and average 


500,000. 


2.03 


10,172. 



As it may be convenient, for ready reference and comparison, 
to know what is the average per cent required by the sinking fund 
method to cover accruing depreciation on the whole plant, we 
divide 10,172 by 5,000 and find it to be 2.03 per cent. 

Referring to the annuity table we find in the 4 per cent column 
for 27 years, 2.12 per cent, and for 28 years, 2 per cent. Then 
the so-called average life, as employed in these sinking fund cal- 
culations, would be something less than 28 years. 

But here again it must be understood fully that no average per 
cent and no "average life" can be derived direct from tables pre- 
pared for general application. Each group of parts of plant must 
be considered by itself and the amount required in each case for 
redemption must be considered as a sinking fund by itself. That 
is, unless the sinking fund is so built up that, at the end of each 
period included in the expectation-of-life table, there will be 
sufficient in the fund to meet the cost of those portions of the 
plant included in each group, without encroaching in the slightest 
degree upon the amounts accumulating to redeem the parts 
included in the other groups, the sinking-fund scheme is mathe- 
matically defective. In still other words, the several amounts to 
cover the several groups, which together make up the total annual 
requirement for the sinking fund as a whole, are each entirely 
separate and distinct sinking funds, though they are combined 
for convenience as to investment. 

Furthermore, we must here again have it in mind that even 
when the sinking fund scheme as developed from the conditions 



THEORETICAL DEPRECIATION 285 

assumed is mathematically correct, that in no measure serves to 
prove the accuracy of our assumptions. All this as thus stated 
sounds very elementary, but almost daily experience demonstrates 
that these elementary truths are lost sight of constantly by some 
of those who attempt to give expert advice on depreciation. 

To further illustrate the error in the ''average life" of 35 years 
by applying this life to a sinking-fund scheme; to illustrate that 
the amounts set aside to cover each plant group should be con- 
sidered as making up a separate sinking fund; to illustrate that 
the amount in each of these sinking funds will equal the amount 
to be redeemed only at the expiration of the expectation-of-life 
period assumed, and that the amount in the combined fund can 
never equal exactly the total plant value unless the life periods for 
all groups of plant terminate at some one time, and then only at 
that particular time; to show that the so-called average life as 
determined by the sinking-fund method and the actual average 
life as determined directly are not the same, and that the sinking- 
fund ''average life" varies with the sinking-fund rate of interest, 
and to open up the subject generally, I shall now make some com- 
putations in detail based upon what has gone before. 

I have already shown that the expectation-of-life table we have 
been considering, giving an average life of 28.38 years, would, 
by some, be erroneously averaged to 35 years ; and this by ignor- 
ing the repeated renewals of parts of plant within the 50 years as 
called for by the table. 

Let us apply this 35 years to a 4 per cent sinking-fund scheme 
and compare with the correct results already given. 

Referring to our annuity table we find in the 4 per cent column 
for 35 years, the rate to be 1.36. We will use the little more 
exact figure of 1.358 as the effort is to be made to balance some 
of our results. Then the total annual payment to be made to the 
combined sinking fund is only 1.358X$5,000=i:$6,790, instead of 
$10,172 as before found to be correct. 

At the end of the first 10 years there will have accumulated 

S=A ^'=0790 i^^^l-J =6790 1^^^=81,514. 
r—\ 1.04 — 1 .04 



286 LECTURE NOTES 

Withdrawing $25,000 required to renew Parts A, we have left 
$81,514— $25,000=$56,514. This will accumulate by the end of 
the next 5 years (15 years in all), when Parts B have to be 
provided for, $56,514X1.2167 ($1.00 compounded 5 years at 4 
per cent) =$68,760; and the additional yearly payments to sink- 
ing fund will accumulate to 

S=6790 i^^J = 6790 ^^JJ^-36,785. 

The total accumulations will be $68,760+$36,785=$105,545. 
Withdrawing the $50,000 required to renew Parts B, we have a 
balance left, $105,545— $50,000=$55,545. 

At the end of the next 5 years (20 years in all) we have to 
provide for a second renewal of Parts A. 

During this time the balance of $55,545 will accumulate to 
$55,545X1.2167=$67,582; and during this time the additional 
annual payments will accumulate to $36,785, as before calculated. 
The total accumulations will be $67,582+$36,785=$104,367. 

Withdrawing the $25,000, to again renew Parts A, we have a 
balance left, $104,367 -$25,000=$79,367. 

At the end of the next 5 years (25 years in all) we have to 
provide for the renewal of Parts C, $100,000. 

During this time the $79,367 will accumulate to $79,367 X 
1.2167=$96,566; and during this time the additional annual 
payments will accumulate to $36,785, as before calculated. The 
total accumulations will be $96,566+$36,785=$133,351. 

Withdrawing the $100,000 to renew Parts C, we have a balance 
left of $33,351. 

At the end of the next 5 years (30 years in all) we have to 
renew Parts A for the third time, $25,000, and Parts B for the 
second time, $50,000, making $75,000 in all. 

During this time the balance of $33,351 will accumulate to 
$33,351X1.2167==$40,578; and the additional annual payments 
will amount to $36,785, making the total accumulations $77,363. 

Withdrawing $75,000 for renewing Parts A for the third time 
and Parts B for the second time, we have a balance left of only 
$77,363— $75,000=r$2,363. 



THEORETICAL DEPRECIATION 287 

At the end of the next 5 years (35 years in all) we have to 
renew Parts D for the first time, requiring $150,000 ; and during 
this time the balance of $2,363 will accumulate to $2,363X1.2167 
=$2,875. 

Adding the accumulations of the annual payments for 5 years, 
$36,785, we have a total accumulation of $2,875+$36,785= 
$39,660. 

So after renewing Parts D, $150,000, we are in debt $150,000 
— $39,660=$110,340. 

Thus at the end of 35 years, which was assumed as the average 
life of plant, we are in debt for depreciation renewals $110,340, 
and falling behind all the time, as will be seen. 

At the end of the next 5 years (40 years in all) we have to 
renew Parts A for the fourth time, requiring $25,000. 

The deficit of $110,340 will during this time increase to 
$110,340X1.2167=$134,251. The total to be provided for 
is therefore $134,251+$25,000=r:$159,251. Against this we 
have only the yearly accumulations amounting to $36,785. So 
now our deficit is increased to $159,251— $36,785=:$122,466. 

At the end of the next 5 years (45 years in all) Parts B have 
to be renewed for the third time, requiring $50,000. 

By this time our deficit will be increased to $122,466 X 
1.2167=$149,004. The total to be provided for is, therefore, 
$149,004+$50,000=$199,004. Against this we have only the 
yearly accumulations, amounting to $36,785. So now our deficit 
is increased to $199,004— $36,785=$162,219. 

At the end of the next 5 years (50 years in all) we have to 
provide for the fifth renewal of Parts A, $25,000, the second 
renewals of Parts C, $100,000, and the first renewal of Parts E, 
$175,000; $300,000 in all. 

The deficit of $162,219 during this time increases to $162,219 
X1.2167=$197,372. The total to be provided is, therefore, 
$300,000+$197,372=$497,372. Against this we have only 
$36,785, the yearly accumulations for the 5 years; which, 
deducted, leaves a deficit of $460,587. 

Thus it is seen that by the incorrect "average life" scheme thus 
tested, at the end of 50 years, notwithstanding having laid aside 



288 LECTURE NOTES 

$6,790 each year at 4 per cent compound interest, we are actually 
in debt for renewals we have been obliged to make to the extent 
of $460,587, the original value of the plant being only $500,000; 
and in addition there is no provision for accrued depreciation, as 
later to be shown. 

In the correct sinking-fund scheme which I have shown, requir- 
ing an annual payment to depreciation sinking fund of $10,172, 
each group of parts is treated separately and, at the end of the 
life of each group, an amount equal to the cost of this group has 
accumulated for renewal, and so this part of annual payment to 
sinking fund is free to go on accumulating to pay for the next 
renewal of the group of parts concerned. 

As before pointed out, while, for convenience of statement and 
to facilitate convenient comparisons with other cases of deprecia- 
tion cost, we may calculate the average per cent of total value 
of plant to be laid aside each year — finding it in this case 2.03 
per cent — still we must not forget that this total is made up of 
distinct annual redemption payments, each to take care of its own 
group of parts of the plant and to renew those parts as often as 
the table calls for. For the purposes of this discussion we will 
call this the separate life scheme. 

As the subject of depreciation is of commanding importance, 
and as the results obtained from the two estimates which I have 
shown differ so widely, and as it is difficult to understand why 
the difference at the end of 50 years should amount to almost 
the original total value of the plant, I shall make a further 
analysis of the results obtained by these two computations. 

If $6,790 (the amount called for by the incorrect "average life" 
scheme) were paid into sinking fund each year and accumulated 
undisturbed for 50 years at 4 per cent compound interest, the 
total accumulations of the sinking fund would then be : 

f^—l 1 04^*^ — 1 7 1067 — 1 

If $10,172, the amount called for by the separate life scheme, 
were treated in the same way, at the end of 50 years the total 
would be : 



THEORETICAL DEPRECIATION 



289 



S=10,172 



y.1067-1 
1.04-1 



1,552,934. 



As the same expectation-of-life table is used in both of these 
cases, the withdrawals would be the same. In the following table 
I show these withdrawals, and I also show the number of years 
in each case remaining up to the end of the 50 years, during 
which the amounts so withdrawn would have gone on accumu- 
lating at 4 per cent compound interest if they had been left un- 
disturbed, and the total accumulation thereby in each case. 



1 


2 


3 


4 


5 


6 


At End 

of 
Years. 


Parts 

to be 

Renewed. 


Amount 
Required 

for 
Renewals. 


Unexpired 
Part of 
50 Year 
Term. 


Value of |1. 

Compounded at 

4% for 

Years Given 


Amounts Ac- 
cumulated at 

End of 50 
Years. Prin- 
cipal and 
Interest. 


Group. 




-$- 


Years. 


Col. 3 X Col. 5 




-$- 


10 


A 
B 
A 
C 
AandB 
D 
A 
B 
A, C and E 


25,000 
50,000 
25,000 

100,000 
75,000 

150,000 
25,000 
50,000 

300,000 


40 
35 
30 
25 
20 
15 
10 
5 



1.04*° =4.8010 
1.0435 = 3.9461 
1.0430 = 3.2434 
1.04^5 = 2.6658 
1.04^0 = 2.1911 
1.04^^ = 1.8009 
1.04^0 _i 4803 

1.04^ =1.2167 
1.04O =1. 


120,025. 


15 

20 


197.305. 

81,085. 

266,580. 


25 


30 


164,332. 


35 


270,135. 


40 

45 


37,005. 

60,835. 

300,000. 


50 




$800,000 


$1,497,302. 



Referring to the ''separate life" scheme we have 
seen that if $10,172 were paid into the sinking fund 
yearly and not disturbed, the total accumulations 
would amount to $1,552,934 

If now we deduct the amounts withdrawn, with 
accumulated interest, as shown in last table . . . $1,497,302 



we find we should have in the sinking fund at the 

end of the 50 years $ 55,632 



290 LECTURE NOTES 

If our calculations are correct, this should equal the accrued 
liability for depreciation at the end of the 50 years after paying 
for all the renewals up to and including that date. Groups A, 
C and E were renewed at the end of 50 years, so we have to con- 
sider only groups B and D. 

B was renewed for the third time at 45 years, and so there has 
accrued a 5-years' liability on those parts of plant. 

D was renewed for the first time at 35 years, and so there has 
accrued a 1 5-years' liability on those parts of plant. 

By the original life table it was shown that Parts B required 
an annual payment to sinking fund of $2,495, and Parts D, $2,040. 

Then there should remain in the sinking fund at the end of 50 
years, after paying for all renewals up to and including that year : 

B. S=8495 14^=2495 ^f^f~/ =13,517 

1.04—1 1.04—1 



54,363 



which practically agrees with the amount remaining in the 
sinking fund after all the withdrawals for renewals just shown, 
amounting to $55,632. The difference would disappear if all 
computations were carried out to a sufficient number of decimals. 

By the incorrect "average life" scheme, we have seen that the 
total in sinking fund at the end of 50 years, if the fund had been 
undisturbed, would have been $1,036,612. 

By the table of withdrawals we found that these 
amounts with interest were $1,497,302 

This shows a deficit of 460,690 

which is in practical agreement with the deficit first 

shown by detailed analysis, which was .... $ 460,587 

If to this deficit we add the accrued liability as shown in the 
case of the "separate life" scheme, we have a total deficit of 
$460,587+$54,363i=$514,950. 

If our computations are correct, this should be equal to the 



THEORETICAL DEPRECIATION 291 

difference between the totals of the accumulations under the two 
systems, if undisturbed to the end of the 50 years : 

Separate life system $1,552,934 

Incorrect average life system 1,036,612 

Difference $ 516,322 

which is in practical agreement with the total deficit already 
shown. 

To guard against possible misconception as to the so-called 
average life of plant in connection with the sinking fund method 
of financing accruing depreciation, we may well consider more 
in detail the difference, in this and some other respects, between 
the sinking-fund method and the direct method. 

We have seen that independently of the method employed to 
finance the accruing depreciation liability, the expectation-of-life 
table requires that at the expiration of life of each group of 
parts, and at each recurrence thereof, the depreciation fund or 
account shall have accumulated an amount equal to the cost of 
that group, and this without depleting the fund with respect to 
the remaining groups of parts. This result is secured, as already 
shown, by considering and providing for each group of parts 
separately. And as we have seen, the total annual charge for 
depreciation will be the sum of these amounts as found to be 
required for the several groups. 

Now, if for purposes of comparison or for any other purpose, 
we wish to average the results so obtained, either as to per cent 
of total cost or average expectation-of-life, by the very terms of 
the proposition we are to consider the plant as a whole, all parts 
expiring at the one time, and the depreciation account or the 
sinking fund to he left undisturbed, to accumulate until the end 
of the average time so found. 

By the direct ("straight line" — no interest) method, charging 
to operating cost each year the total estimated accrued deprecia- 
tion for the year, the accumulation of annual payments to the 
credit of the account must necessarily be equal at the end of each 
and every year to the total estimated accrued depreciation. 

By the compound interest sinking-fund scheme this necessarily 



292 LECTURE NOTES 

would never be the case unless a time were reached when all 
parts of the plant expired at the same time, and then only at 
the end of that time ; for here it must not be forgotten that only 
at the end of each group life will the annual payments plus 
interest accumulation equal the group cost. In the expectation- 
of-life table which we have been using for illustration there will 
be for many cycles an overlapping of the life periods of the 
several groups of parts of plant, and there would be in the sinking 
fund an amount equal to the accrued depreciation only at the end 
of each period of 1,050 years, though there will always be enough 
to meet the requirements of each group of parts at each expira- 
tion of its assumed life. To illustrate : 

We have seen that at the end of 50 years we should have in 
the correctly computed 4 per cent sinking fund, after making all 
payments required for the renewal of groups of parts A, B, C, D 
and E, $55,632. The computations were then made to show 
what should be the accrued sinking-fund liability on account of 
the depreciation of groups B and D, the lives of which overlap 
the 50 years included in the table. It was then shown that the 
5 years' sinking-fund liability on group B, and the 15 
years' on group D, would amount to $54,363, being practically 
in agreement with the balance found in the sinking fund. But 
this is not equal to the accrued estimated depreciation under the 
assumption that the depreciation is uniform year by year, which 
would amount to 

Group B. 15 years life, $50,000. Depreciation 
accrued on 5 years elapsed after third 
renewal, $50,000X^/i= $16,666.67 

Group D. 35 years life, $150,000. Depreciation 
accrued on 15 years elapsed after first 
renewal, $150,000X^4= 64,285.71 



Total accrued depreciation, $80,952.38 

We have also seen that by the direct method, the total annual 
charge for depreciation according to the expectation-of-life table 



THEORETICAL DEPRECIATION 293 

we have been using, is $17,619, which is 3.524 per cent of 
$500,000, the assumed net cost of plant ; and dividing the $500,000 
by the annual charge of $17,619, we have found the average life 
of plant to be 28.378 years. 

By the 4 per cent sinking-fund scheme we found the total 
annual payment to be $10,172, which is 2.03 per cent of $500,000, 
and by reference to the 4 per cent annuity table we found 
the average 4 per cent sinking fund life to be something less than 
28 years. The average life and the sinking-fund average life so 
found are so nearly alike that one might be led to suppose that 
they should be in complete agreement, and that the failure to so 
agree is due to lack of exactness in the compound interest com- 
putations. But if the average sinking-fund life is computed 
directly from the equation it is found to be 27.73 years. 

A little study shows that an agreement should not be expected. 

The 28.378 is a true average life as based upon the assumed 
table, — that is, the number of years which will elapse when the 
plant will have depreciated to an amount equal to its net first 
cost of $^00,000, and hence the number of years in which the 
sum of the annual payments, each equal to the annual deprecia- 
tion, $17,619, will, if not withdrawn, equal the total net cost of 
plant. 

As opposed to this, the 27.73 years is the number of years in 
which an annual payment of $10,172 into a 4 per cent sinking 
fund will accumulate to $500,000, if nothing is withdrawn from 
the fund in the meantime. 

To illustrate further that the average life as found from the 
direct method is not the same as the time during which a com- 
pound interest sinking-fund scheme, if undisturbed, will accumu- 
late the total net cost of plant, I show for comparison, in the 
following table, the direct method ("straight line") and a 2 per 
cent, 4 per cent, and 6 per cent sinking fund applied to the 
expectation-of-life table which we have been using : 



294 



LECTURE NOTES 





Expecta- 
tion-of- 
Lif e in 
Years. 


Cost of 

Plant 

Groups. 

Dollars, 


Annual Payments to Cover Depreciation. 


Groups of 

Parts of 

Plant. 


Sinking Funds 


Direct 
"Straight Line." 




6% 


4% 


2% 


No Interest. 


A 
B 
C 
D 
E 


10 
15 
25 
35 
50 


25,000. 

50,000. 
100,000. 
150,000. 
175,000. 


1,897. 
2,150. 
1,820. 
1,350. 
595. 


2,082. 
2,495. 
2,400. 
2,040. 
1,155. 


2,283. 
2,892. 
3,122. 
3,000. 
2,068. 


2,500. 
3,333.33 

4,000. 

4,285.71 

3,500. 


Totals 


500,000. 


7,812. 


10,172. 


13,365. 


17,619. 


Annual payment in per cent of 

plant cost 
If undisturbed, years required to 

accumulate total cost of plant 


1.562 
27.05 


2.03 
27.73 


2.673 

28.2 


3.524 

28.378 



It is thus seen that the compound interest sinking-fund scheme 
is essentially different from the direct scheme which does not 
involve interest accumulations. And by the above table it is 
shown that the average life, as determined correctly by the direct 
scheme, is longer than the time found by averaging the sinking- 
fund payments; also that the higher the sinking-fund rate of 
interest the shorter will be the time so found. 

Thus it is seen that it is misleading to speak of the average 
life as found from a compound interest sinking fund. 

We have now considered at some length the two methods of 
financing theoretical depreciation: 

vThe direct, or "straight line," method by which the total annual 
cost of accruing depreciation is invested in plant betterments or 
extensions ; /and the 

\3inking-fund method, by which such an amount only shall be 
set aside each year as will meet the demands of the expectation- 
of-life table, if allowed to accumulate at compound interest. 

In the example we have followed through, it is found that the 
first method requires an annual charge against income of $17,619, 
whereas the 4 per cent sinking-fund method requires an annual 
charge of only $10,172. 

This large difference is an argument frequently used in favor 
of the sinking-fund method. But I have already pointed out 



THEORETICAL DEPRECIATION 295 

that if there is required annually for extensions and betterments 
an amount equal to or in excess of the annual cost of deprecia- 
tion, and these extensions and betterments promise to increase 
our net earnings to an amount in excess of 4 per cent (or other 
rate obtainable in a sinking fund) it is economy to so employ 
the depreciation fund. 
(The question is then asked frequently, If the depreciation fund 
is expended for betterments and exten:sions, how shall the 
renewals be paid for when the times for such renewals arrive? 
The answer to this is, that unless the depreciation fund had been 
so drawn upon, the financing of the betterments and extensions 
must have been met by some other means and these means can 
now be better employed to pay for the renewals. The proba- 
bilities are that if the depreciation fund had been put out at 
interest, money for improvements would have been borrowed at a 
higher rate of interest. The day of borrowing has been post- 
poned and money so saved. 

Here it is to be borne in mind again that the financing of the 
depreciation fund is quite apart from the estimating of the cost 
of depreciation and the charging of this loss annually against 
income. If the assets as a whole are so maintained at cost, it is 
a secondary consideration as to the exact form of the assets, 
provided they are as fully productive as conditions permit. 

Some "experts" contend that the depreciation fund should be 
held inviolate to renew each individual part of the plant as it is 
abandoned. Perhaps certain parts of the plant never will be 
renewed, but some equivalent may be substituted or even some 
part may be installed to produce income from a different and 
more productive line of manufacture. This is one of the con- 
siderations in mind when we include obsolescence in the estimate 
of accruing depreciation. Should we then renew the part to be 
abandoned irrespective of the question of efficient and economical 
management? The question answers itself; and yet this question 
logically follows from the arguments sometimes made against 
employing the depreciation fund in the ways I have advised. 

Especially in the earlier years of a new undertaking, in the 
effort to make as good a showing of profits as possible, the 



296 LECTURE NOTES 

smaller sinking fund charge for depreciation is resorted to. 
Sometimes the same reason governs in the case of concerns long 
established. 

In the case of the depreciation fund being invested in our own 
business, the separate and additional profits earned by each 
betterment or extension paid for from the fund could be segre- 
gated so as to determine in each case the exact rate of return; 
but this would require a most complicated scheme of accounting 
without returning adequate benefit. 

It is assumed, of course, that the methods of accounting 
followed would furnish sufficient information to determine in a 
general way whether these extensions and betterments were 
giving, either directly or indirectly, such a return as to warrant 
the expenditure. 

If, however, we should decide to set aside for depreciation the 
amount called for by a sinking fund, the company to sustain 
its own sinking fund from the undivided income of the business, 
the annual payment would, of course, increase year by year. ; 

The following table is introduced to show how the annual 
payments would increase and to emphasize the fact that the 
actual loss by depreciation is not limited to the amount taken 
from profits and placed in a sinking fund, but also includes the 
interest accumulations. 

For this table an average sinking-fund life of 40 years is 
applied to a 4 per cent and a 5 per cent sinking fund : 



THEORETICAL DEPRECIATION 



297 



Result of Company Operating Its Own Sinking Fund 
AND Thus Having to Supply Principal and Interest. 

40 Years Sinking Fund Life. Yearly Payments per $100 
to Include Compound Interest Accumulations as Obtained 
from Earnings. 





4% Compounded Annually 


5% Compounded Annually 




Amount annually required 


Amount annually required 




to accumulate $100 in a 4% 


to accumulate $100 in a 5% 




Sinking Fund at end of 40 


Sinking F 


und at end of 40 




years is $1.05. 


years is $0.83. 


Years 










Yearly payments 
being 1.05 multi- 




Yearly payments 




$1 Com- 


$1 Com- 


being .83 multi- 




pounded 


plied by number 


pounded 


plied by number 




at 4% 


in preceding col- 
umn. 


at 5% 


in preceding col- 
umn. 


1 


1.0000 


1.0500 


1.0000 


.8300 


3 


1.0400 


1.0920 


1.0500 


.8715 


3 


1.0816 


1.1357 


1.1025 


.9151 


4 


1.1249 


1.1811 


1.1576 


.9608 


5 


1.1699 


1.2284 


1.2155 


1.0089 


6 


1.2167 


1.2775 


1.2763 


1.0593 


7 


1.2653 


1.3286 


1.3401 


1.1123 


8 


1.3159 


1.3817 


1.4071 


1.1679 


9 


1.3686 


1.4370 


1 .4775 


1.2263 


10 


1.4233 


1.4945 


1.5513 


1.2876 


11 


1.4802 


1.5542 


1.6289 


1.3520 


12 


1.5395 


1.6165 


1.7103 


1.4195 


13 


1.6010 


1.6811 


1.7959 


1.4906 


14 


1.6651 


1.7484 


1.8856 


1.5650 


15 


1.7317 


1.8183 


1.9799 


1.6433 


16 


1.8009 


1.8909 


2.0789 


1.7255 


17 


1.8730 


1.9667 


2.1829 


1.8118 


18 


1.9479 


2.0453 


2.2920 


1.9024 


19 


2.0258 


, 2.1271 


2.4066 


1.9975 


20 


2.1068 


2.2121 


2.5270 


2.0974 


21 


2.1911 


2.3007 


2.6533 


2.2022 


22 


2.2788 


2.3927 


2.7860 


2.3124 


23 


2.3699 


2.4884 


2.9253 


2.4280 


24 


2.4647 


2.5879 


3.0715 


2.5493 


2B 


2.5633 


2.6915 


3.2251 


2.6768 


26 


2.6658 


2.7991 


3.3864 


2.8107 


27 


2.7725 


2.9111 


3.5557 


2.9512 


28 


2.8834 


3.0276 


3.7335 


3.0988 


29 


2.9987 


3.1486 


3.9201 


3.2.')37 


30 


3.1187 


3.2746 


4.1161 


3.4164 


31 


3.2434 


3.4056 


4.3219 


3.5872 


32 


3.3731 


3.5418 


4.5380 


3.7665 


33 


3.5081 


3.6835 


4.7649 


3.9549 


34 


3.6484 


3.8308 


5.0032 


4.1526 


35 


3.7943 


3.9840 


5.2533 


4.3602 


36 


3.9461 


4.1434 


5.5160 


4.5783 


37 


4.1039 


4.3091 


5.7918 


4.8072 


38 


4.2681 


4.4815 


6.0814 


5.0476 


39 


4.4388 


4.6607 


6.3855 


5.3000 


40 


4.6164 


4.8472 


6.7048 


5.5650 






$99.7769 




$100.2637 



298 LECTURE NOTES 

This table serves well to illustrate the material influence of 
compound interest accumulations, for we find in the cases here 
given that in the 4 per cent fund the principal, or sum of annual 
payments, is only 40X1-05 = 42. 

While the interest accumulations = 58. 

100. 

In the 5 per cent fund the principal is 
40X.83 = 33.20 

while the interest accumulations = 66.80 



100.00 



Mr. Henry Floy has recently presented to the American Insti- 
tute of Electrical Engineers a paper entitled, "Depreciation as 
Related to Electrical Properties." This paper is a valuable con- 
tribution to the bibliography on this vexed question, and I 
recommend you to study the paper and the discussion which it 
will undoubtedly call forth, all to be found in an issue of the 
transactions yet to be published. 

Mr. Floy has granted me the privilege of reproducing from his 
paper a plate which gives the workings of the sinking fund for 
three rates of interest, 3, 4, and 5 per cent. (See page 572.) 

Mr. Floy's explanation of his plate is as follows : 

''As 3, 4, and 5 per cent are rather common rates of return on 
funds allowed to accrue with interest, the curves on the accom- 
panying plate are given, indicating the values in percentages that 
obtain at any given time for apparatus having lives varying from 
5 to 100 years. The abscissa graduated from to 100 indicates 
the age, the ordinates to 100 indicate either the percentage of 
depreciation to be subtracted from the cost to obtain theoretical 
present value or the percentage of the original value direct. To 
use the curves, start from a point on the abscissa indicating the 
life already expired, follow the vertical until it intersects with the 
curve marked with the assumed life of the property being con- 
sidered, then follow the horizontal to the left and read from the 



THEORETICAL DEPRECIATION 299 

ordinate the percentage of depreciation or the remaining present 
value as may be desired." 

It will be seen that by drawing a straight line from the two 
points connected by any of these curves, we have the "straight 
line," or full cost of depreciation, for the several expectations-of- 
life covered by the diagram. 

Before closing the chapter on "theoretical" or estimated accru- 
ing depreciation, a few words may be said on appreciation as 
offsetting depreciation. 

Sometimes the increased value of real estate will compensate 
for the decreased value of plant due to depreciation ; but it should 
be manifest that any assumption to this effect cannot be made in 
advance safely. This is an illustration of the element of specula- 
tion which, with or without our consent, finds a place in every 
business venture, and tends to complicate our estimates as to the 
future. In the case of real estate the chances are in favor of an 
increase in value, but this increase may be more than needed to 
offset other conditions which have developed unfavorably. 

The value of the business as a "going concern," including 
perhaps franchise and good will, may so appreciate as to compen- 
sate in part or wholly or even more than compensate for accrued 
depreciation of plant. But here again we cannot safely make such 
an assumption, especially in the case of public service corporations 
subject to the control of commissions, some of which find it diffi- 
cult to allow, in opposition to an uninformed and prejudiced 
public opinion, that property and rights in property may extend 
far beyond the limits set by physical assets. 

In taking over a property or group of properties, the accrued 
depreciation should be covered in the purchase price. The plant 
may be in need not only of repairs but of extensions. Then the 
cost of repairs, renewals, extensions and improvements should be 
estimated most carefully and included as part of the purchase cost. 

To carry on the business economically after purchase, the plant 
must be put into condition for thoroughly efficient operation. 
Having estimated carefully the cost of the required restorations, 
extensions, and improvements and added this to the purchase 



300 LECTURE NOTES 

price, it remains to be determined whether the total cost so found 
is warranted by the reasonably certain prospective profits. 

But here it is to be borne in mind most carefully that if we 
include rehabilitation of plant as part of cost and cover the total 
cost by capital obligations, we should at once set up a scheme to 
cover the depreciation to accrue on the plant as a whole. It may 
be claimed that with a new or rehabilitated plant this depreciation 
does not commence at once ; that the plant may even improve in 
efficiency or service value for a certain length of time depending 
upon how long it takes to "find itself." If this factor is to be con- 
sidered, as it well may be in certain cases, it is better to introduce 
it as one of the factors in developing the expectation-of-life table 
than to delay in starting the depreciation fund. As in many other 
situations there is danger here in delay. 

It is possible that the results obtained from the business, as 
shown by a competent analysis of the books of account and other 
records, would show an inadequate rate of profit on the proposed 
enlarged capital. Here we are warranted in giving some weight to 
a conservative estimate of the increase in profits to be expected 
from the improved plant and improved management of plant and 
business. It can be seen, though, that this may become a danger- 
ous element in the financing of schemes of reorganization and con- 
solidation. The investing public, and to a less extent the bankers 
who purchase the securities in the first instance, are dependent 
upon the estimates of cost of improvements and of increase in 
earnings furnished by the experts employed. 

This subject is too large to be covered in this brief and neces- 
sarily incomplete course on the business side of engineering, but 
I have said enough to show that the technical expert, to be relied 
upon safely first by the banker and then, through the banker, by 
the investing public, must be thoroughly competent, technically 
and commercially. But this is not enough — he must be honest and 
have the courage of his convictions ; he must be strong enough to 
express his real convictions when tempted to profit by the mis- 
representation of facts or by the telling of half truths. 

Through the underestimating of the cost of rehabilitation and 
extensions, and the overestimating of the profits to be derived 



THEORETICAL DEPRECIATION 301 

therefrom, there have been too many cass of illegitimate profit 
to the promotors with accompanying loss to the innocent 
investors. 

See to it that none of you, either through ignorance or design, 
are responsible for so deceiving those placing their faith in you. 
In this connection there is resting upon you a professional respon- 
sibility as great as that resting upon the doctor and the lawyer; 
for remember there are many ills worse than death which may 
follow in the train of wrecked fortunes. 

(Finally, in regard to accruing or theoretical depreciation, let it 
never be forgotten : 

1. Any expectation-of-life table employed in estimating prob- 
able or possible accruing depreciation must be based of necessity 
upon competently informed judgment. 

2. Then it follows that the expectation-of-life table should be 
corrected and amended from year to year as dictated by changes in 
limiting conditions. 

3. The life estimates must be based upon consideration of 
probabilities as to obsolescence, inadequacy, and physical decay. 
While accidents or sudden damage cannot be measured in 
advance, their possibility is not to be forgotten. 

4. Electrolysis in some cases will be a loss factor even though 
we cannot estimate the amount of the loss. 

5. The theoretical depreciation due to obsolescence, inade- 
quacy, and physical decay will depend in large measure upon 
original design and construction. 

6. Repairs and current renewals must be considered fully in 
estimating the probable cost of accruing depreciation; and all 
other things being equal, the more completely and competently 
the plant is maintained by current repairs and renewals which, 
as far as possible, eliminate obsolescence and inadequacy as well 
as physical decay, the smaller should be the annual charge to 
meet accruing depreciation. 

7. In the expectation-of-life table each part of plant must be 
considered by itself and grouped accordingly ; and each group of 
parts of plant must be provided for as to renewal and each 



302 LECTURE NOTES 

repeated renewal within the period set by the longest life included 
in the table. 

8. The cost of accruing depreciation should not be confused 
with figures obtained by considering the financial methods to be 
employed in caring for depreciation loss. In any case the esti- 
mated annual loss with be the net cost divided by the years of 
estimated effective service. 

9. If the loss is covered by a sinking fund, then the interest 
accumulations must be recognized as part of the cost, as shown 
by the table above, — "Result of company operating its own Sink- 
ing Fund." 

10. In analysing and comparing several unit costs of accruing 
depreciation, the respective accounting methods employed must 
be understood and adjustments made accordingly. 

11. Even in the case of undertakings which employ a uniform 
system of accounts, when comparing given unit costs of deprecia- 
tion, variations, avoidable and unavoidable, in applying the system 
will tend to affect the accuracy and reliability of the comparisons. 

12. These points accepted, it is evident that expectation-of-life 
tables and estimates of accruing (theoretical) depreciation based 
thereon, cannot be used to determine the present absolute or 
actual depreciation as found in the appraisal of properties. \ 



- DEPRECIATION 

Actual Depreciation 

As we have already seen, in considering questions involved in 
depreciation a strong line of demarcation is to be recognized 
between the problem of estimating the probable or possible 
future cost of depreciation as an annual loss item, and the deter- 
mination of the actual depreciation which has already taken place 
in a plant under inspection. 

The first is theoretical depreciation ; the second is actual depre- 
ciation. If, year by year, the annual cost of plant renewals were 
about the same per cent of the cost of the whole plant, and if 
by the experience of a series of years it were found that there 
was no further depreciation accruing against plant investment, 
there would be no necessity for estimating theoretical deprecia- 
tion or charging therefor to operating cost. This is the condition 
in some large systems made up of many plants built at different 
times. This may well be true in the case of extensive railroad 
systems, telegraph and telephone systems, and the like. But if 
the charges for plant renewal vary widely from year to year, and 
especially in the case of the early years of a single plant, theo- 
retical depreciation should be estimated so that the annual loss 
therefrom shall be included in Loss and Gain Account before the 
balance of profit or loss is shown. 

As we have seen, this necessarily is an estimate based in each 
case upon certain conditions discoverable by expert examination 
and certain assumptions made upon expert judgment and experi- 
ence. 

It would not be reasonable to expect that such an estimate, 
closely adhered to through a number of years without amend- 
ment, would then be found to have covered exactly the actual 
depreciation. Such a close agreement between the original esti- 
mate and the final result could only be by accident, particularly 
as the estimate should be made liberal enough to cover contin- 



304 LECTURE NOTES 

gencies. Some of the conditions in control when the original 
estimate was made would undoubtedly have changed as time went 
on, especially so in connection with changes in management. 
But if we attempt to determine the actual depreciation of a plant 
in operation by the application of a life table used years before 
as the basis for an estimate of theoretical depreciation, we are 
assuming that this original life table is correct. 

If such an assumption is unjustifiable in the case of an estimate 
of theoretical depreciation applied after the lapse of a number 
of years in determining the actual depreciation of the plant for 
which the estimate was made, how completely indefensible for 
such a purpose is the application of a life table developed either 
by averaging data compiled from widely varying conditions, by 
widely varying methods, or by arbitrarily assuming that a life 
table based upon certain specific conditions can be made available 
for general application? And yet it is one of these last two 
methods which is employed by the experts who rely upon life 
tables in estimating actual depreciation in connection with the 
making of appraisals. Naturally they claim that they have 
introduced corrections and modifications to meet the specific con- 
ditions encountered, but they find it difficult under competent 
cross-examination to justify this claim. 

A source of disagreement between estimated and actual depre- 
ciation, not readily recognized by theorists who have had little or 
no practical experience, is found in the insufficiency of some of 
the schemes of classification. A still greater source of disagree- 
ment is often found in the difficulty experienced in exactly com- 
plying with the requirements of even a well-planned scheme of 
classification, and especially in connection with items involving 
both repairs and improvements and so requiring a nice discrim- 
ination between operating cost and capital investment. Not 
infrequently we find, where the practice in such cases is to charge 
liberally to repair accounts and correspondingly favor improve- 
ment accounts, that the cost of all accruing depreciation is fully 
covered. 

This is well exemplified in the practice of certain British gas 
companies which advisedly classify their expenditures thus 



ACTUAL DEPRECIATION 305 

liberally against repairs and current renewals for the express 
purpose of covering accruing depreciation. 

Let it then be understood that items of expenditure which by 
a strict compliance with the rules of classification should be 
charged to betterments and extensions, if charged in sufficient 
amount to operating cost through the repair accounts, can be 
so made to compensate for all accruing depreciation due to obso- 
lescence, inadequacy, and physical decay. 

While I advocate charging to repairs (operating cost) if 
finally in doubt, I do not advocate a deliberate departure from 
the scheme of classification; but if such a practice has prevailed 
in connection with a plant under examination, we should be 
prompt to recognize the fact and make due allowances therefor. 

A superficial consideration of these features of our subject 
should be sufficient to convince those who in any degree preserve 
on open mind how indefensible is the position taken by certain 
engineers, statisticians, and accountants in assuming that an 
annual rate of depreciation as found in a table of averages can 
be applied to specific cases. 

Some of these men, who unfortunately exercise such a danger- 
ous influence to-day in connection with the conduct of our public 
utilities, go so far as to claim that all gas works (as an example) 
should be charged with a certain uniform rate of annual 
depreciation. Others, not quite so ignorant or not quite so unfair, 
claim that it is allowable to assume that certain parts of a gas 
plant should be charged with a certain uniform rate of deprecia- 
tion. They might as well claim that a suit of clothes made of 
shoddy promises as long a life as a suit made from the best 
woolen cloth; or that two suits of clothes of the same quality 
would have the same life irrespective of the wear to which they 
are subjected and the promptness and thoroughness with which 
they are repaired. 

I wish, then, to warn you men with all possible emphasis 
against being led into this error of accepting any general deprecia- 
tion percentages whether for the determination of theoretical or 
actual depreciation. 

And I also wish to warn you that you must be prepared, 



306 LECTURE NOTES 

through a full appreciation of and a firm grip upon the underly- 
ing common sense of this most important subject, to disprove 
false claims based upon incorrect data and upon correct data 
when unfairly analysed and speciously presented. Here you 
must be prepared to encounter men who make a specialty of 
appraising properties at the lowest plausible values, and who get 
the opportunities to earn liberal fees because of the reputations 
they have established for cleverness and adroitness on the witness 
stand in drawing at will widely varying conclusions from the one 
collection of data. 

To assist further in combating the fallacies so ably presented 
by these advocates of destructive policies, fallacies too readily 
and willingly accepted by many in authority, I shall endeavor 
to show by additional illustrations the distinction to be made 
between theoretical and actual depreciation. 

If we were asked to state the actual cost of construction of a 
certain plant, would we refer to the estimate made before the 
construction was begun, or would we consult the accounts which 
record the actual expenditures, including the cost of preliminary 
estimates and surveys, items actually forgotten and so omitted 
from the estimate, contingencies not provided for, and many 
overhead charges, such as interest during construction, accident 
and liability insurance, legal expenses, engineering and super- 
vision — items so frequently ignored or insufficiently covered in 
engineers' estimates? The question answers itself. 

If we were disposed to guide ourselves by an estimate of depre- 
ciation made twenty years before, would it not be incumbent on 
us as fair and intelligent men to check up the operations of those 
past twenty years to determine whether the conditions incorpo- 
rated in the estimate, actual and assumed, including in every 
detail the methods of accounting necessarily a factor in every 
estimate of accruing depreciation, had been in control throughout 
the whole twenty years? 

But why undertake such a burdensome task when the facts 
are available and can be authoritatively interpreted by those suffi- 
ciently trained in the theory and practice of the particular 
industry concerned? 



ACTUAL DEPRECIATION 307 

Let it now be understood that the two elements of depreciation 
most difficult to cover in an estimate of theoretical depreciation 
are obsolescence and inadequacy. With this in mind, suppose we 
are appraising the distribution system of a gas company. Then 
those two elements are quickly and accurately disposed of by 
expert examination of the plant as far as exposed, and by inves- 
tigation of the methods of operation, particularly as to mainte- 
nance. If the mains are standard cast-iron pipes, obsolescence is 
disposed of because they represent good modern practice. A 
study of the general layout and size of mains, the maximum 
output and prospects of immediate increase, together with the 
records of pressures throughout the system, enables us to deter- 
mine the question of adequacy. The only element remaining is 
physical decay. This is more difficult to determine than it was 
some years ago because of the injury to mains and service pipes 
now being caused in certain localities by electrolysis. According 
to a modern theory all rusting of iron under ground is due to 
electrolytic action ; but I am now referring to the electrolysis due 
to stray currents from electric power plants. Before the advent 
of electric traction, when this destructive agency entered into the 
problem, cast-iron pipes, as properly laid in most soils and left 
undisturbed in their beds, might have been considered as practi- 
cally indestructible. But while we no longer have such favorable 
conditions, and electrolysis must now be reckoned with, the injury 
to an underground distributing system due to this cause is not 
quite so difficult to estimate as it was some few years ago; and 
by competent electric surveys the portions of the system most 
affected can be located and the measures required for correction 
can be taken advisedly. The examination for appraisal can deter- 
mine whether these steps have been and are being taken regularly, 
and if not a complete survey can be made. The examination 
should determine whether the expenditures for repairs have been 
charged to operating expense, or preferably to a suspense account 
upon which to base a claim against the electric company respon- 
sible for the damage. 

As I am writing I have before me for consideration a case 
which will serve by way of illustration. An expert for a certain 



308 LECTURE NOTES 

city engaged in a controversy with the local gas company, an 
engineer of excellent reputation and experienced as a constructor 
of industrial buildings and certain kinds of plant, but inex- 
perienced as a constructor and operator of gas plants, made an 
appraisal of the gas company's plant, and, guiding himself largely 
by considerations of theoretical depreciation, his total valuation 
was less than one half that of the gas company's appraisers. 
From his reproduction cost of the cast-iron mains he deducted 
25 per cent for depreciation. As already shown, there was no 
basis for deduction on the score of obsolescence. In this par- 
ticular case inadequacy was eliminated because the mains were 
of ample capacity to distribute efficiently more than double the 
maximum output. There was no contention on the score of 
either obsolescence or inadequacy. This left only physical decay 
to be considered. In some few localities the main had been 
damaged by electrolysis, but the proportion of such pipe was 
extremely small. The test holes were put down at points 
agreed upon as likely to furnish an average of the condition as 
a whole, and pipes which had been laid for forty and fifty years 
were found to be practically as good as the day they were laid. 
It was shown that competent electrolysis surveys had been made 
and great care had been and was being exercised to repair and 
renew the mains affected and to maintain the whole system in 
thoroughly serviceable condition. 

As bearing upon another feature of the appraisal and one of 
great importance, the city's expert failed to include as part of the 
cost of reproduction the cost of pavements which would have to 
be removed and replaced in reproducing the distributing system. 
Still worse, he omitted the cost of the pavement v\^hich the com- 
pany had actually removed and replaced when laying its mains 
and services. Even if there is room for question as to the inclu- 
sion of the cost of all paving as found at the time of estimating 
cost of reproduction, which I claim should be included, there can 
be no question that the cost of the pavement actually taken up 
and replaced by the company should be allowed as part of the 
reproduction cost. 

In the item of service pipes, made of wrought-iron, this 



ACTUAL DEPRECIATION 309 

engineer was still more drastic in his treatment of depreciation. 
On this portion of the system he deducted 50 per cent. Here 
obsolescence and inadequacy were eliminated, for wrought-iron 
pipe, especially when efficiently coated as in this case, is modern 
practice. The pipes were ample in size and so adequate. As to 
physical decay, it was shown that the pipes were inspected, 
repaired and renewed as weaknesses were developed ; and further, 
that in accordance with city regulations, whenever the pavement 
in a street was to be renewed, or a new pavement to be laid, the 
services had to be inspected thoroughly, and recoated or renewed 
as found to be necessary. Thus, notwithstanding the fact that 
this portion of the plant was maintained in accordance with the 
most advanced practice, the investment therein was cut in half. 

This engineer was persistent in his inquiries as to the age of 
the component parts of the distributing system — as he was of the 
parts of the manufacturing plant — and evidently guided himself 
as to depreciation largely by the age of each part. It was some- 
what of a shock to the age theory when it was discovered that 
some of the pipes which at first were taken to be of tender years 
because they were found to be in such good condition, were 
shown to have been laid a half century before. 

Let us consider how this application to actual depreciation of 
the life-table method as used in estimating theoretical deprecia- 
tion would work out in the case of these service pipes if another 
appraisal were made some years in the future. 

Suppose at the time of the later appraisal the average age of 
these particular services were found or taken to be double the 
age assumed in the former appraisal, the plant in the meantime 
to have been maintained systematically and thoroughly as in the 
past. Many of these particular services will have been renewed, 
and a not inconsiderable number will be practically new at the 
time of the later appraisal. Under these circumstances this 
portion of the system should be found to have a service or operat- 
ing value equal to its service value at the time of the former 
appraisal. And yet, if the second half of the assumed life has 
elapsed and the same rule is applied, another 50 per cent must be 
deducted for depreciation. Consequently these particular service 



310 LECTURE NOTES 

pipes must be inventoried as of no value and hence not to be 
capitalized, although thousands of gas consumers are being 
supplied through them in a way satisfactory both to seller and 
buyer. 

In this same appraisal the consumers' meters were depreciated 
25 per cent, notwithstanding the fact that they were found to 
be maintained by means of a system of constant inspection, repair, 
renewal, and condemnation under the eye of a Public Service 
Commission inspector, the complete round of all the meters being 
made every five years, all as described in the previous chapter on 
theoretical depreciation. It would be difficult to conceive of a 
plan better calculated than this to care for theoretical and actual 
depreciation. 

In appraising the manufacturing plant the same heavy deduc- 
tions were made for depreciation, chiefly on the score of age. 
One item will serve as an example — a certain station meter. This 
is the apparatus employed to measure the volume of the finished 
gas before it passes to the storage holders. The case of this 
meter was made of cast-iron. As originally built the drum was 
of the four-partition type. The city's expert admitted that the 
cast-iron case or shell was not depreciated. As to obsolescence 
the four-partition drum might be considered as not up to the best 
modern practice. As to inadequacy, the meter was of ample 
capacity for the service required of it. As it happened, this 
meter a short time before the appraisal had been reconstructed, 
the old four-partition drum had been replaced by a new "Hin- 
man" three-partition drum, which brought the apparatus as a 
whole up to the most modern practice and, at the same time, con- 
siderably increased its capacity. By these repairs and changes, 
the meter was from every standpoint made of greater value than 
on the day it was first installed. And yet this part of the plant 
was depreciated 10 per cent. Some portions of the plant were 
given no value on the score of obsolescence, this engineer having 
heard of other forms of apparatus for the same service which he 
understood were more modern, although the apparatus he had 
thus condemned was in satisfactory use the world over and par- 



ACTUAL DEPRECIATION 311 

ticularly recommended by some because of its simplicity of con- 
struction and operation. 

The above case shows the errors into which an engineer may 
fall who is thoroughly honest in his intentions, is competent as a 
constructor of certain kinds of plant and a safe adviser along 
those lines, but inexperienced in the specific line of construction 
and operation in which he ventures to give expert testimony. This 
expert probably had not studied the question of depreciation from 
the standpoint of the operator, and as a constructor was imbued 
with the idea that second-hand plant is necessarily depreciated in 
value, and the greater its age the greater the depreciation. He 
was also acting under certain rules laid down for him, requiring 
him to omit from his inventory all plant not found to be in opera- 
tion at the time of the appraisal ; an instruction which an operator 
familiar with the conditions would have refused to recognize, 
knowing that surplus capacity plant must be held in reserve for 
wide and sudden fluctuations in output. 

Now we come to a case of so-called expert testimony of very 
different character. I have said that in the case just narrated the 
engineer intended to be honest. Let that suffice. This case also 
involved an appraisal which was made in connection with a rate- 
fixing case. Two experts acted for the city. I am sorry to say 
both of these men had been professors in two of our important 
universities. One had been a professor of economics and the 
other of engineering. The first was in no sense an engineer; he 
had had no experience in the construction or operation of gas 
properties, but had saturated himself with gas statistics and data 
which he used with great facility and ready inconsistency. The 
other had had some little experience in gas engineering, most of 
which dated back about thirty-five years to the time immediately 
after his graduation. He also was an adroit manipulator of sta- 
tistics and data as required to meet each case in hand. 

The ex-professor of engineering inventoried the plant and as- 
sumed to appraise its value new on the basis of cost of reproduc- 
tion. In adopting unit prices for material and labor he allowed 
himself a conveniently wide range of market conditions. Some- 
times he used present market prices, sometimes those of five or 



312 LECTURE NOTES 

ten years back, and sometimes prices averaged through a number 
of years. 

The ex-professor of engineering having thus produced what he 
was pleased to describe as the cost of reproduction of the manu- 
facturing plant, the ex-professor of economics took up the story 
to show what should be deducted for depreciation. He made his 
computations solely on the age basis, avowedly disregarding the 
actual condition of the plant. In fact, he could not have taken 
the present condition into consideration as he did not pretend 
that he had examined the plant in detail, and by cross-examination 
it was shown that he was unable to describe the operation of 
many of the simplest parts of the manufacturing plant. In fact, 
the engineer professor was also found to be somewhat deficient 
in this regard. 

The depreciation expert started off by quoting Alex. C. 
Humphreys as having testified about ten years before in the 
Holyoke Gas case that a (any) gas plant would have an ''average 
life" of forty years. He then proceeded to testify that from such 
information as he had been able to gather the average age of the 
plant under consideration was twenty years. Hence the value 
was reduced one half. It is thus seen that the amount to be 
deducted for depreciation was found by an extremely simple 
arithmetical calculation. At least this gentleman's process of 
estimating depreciation should be commended for its lack of 
complexity. 

But by cross-examination of this witness and by testimony for 
the Gas Company it was shown : 

First: That Alex. C. Humphreys had not so testified in the 
Holyoke or any other case, but that the ''life-table" developed in 
the Holyoke case was based upon the conditions there and then 
found ; that it was only intended for use in estimating theoretical 
depreciation ; that it was only so employed in that case ; that the 
printed report of the case showed that the witness had repeatedly 
stated under direct and cross-examination that no general or 
average life figures could be used independently of local and 
other specific conditions; and that he had directly and emphati- 
cally testified that such a life-table could not be used in deter- 



ACTUAL DEPRECIATION 313 

mining actual depreciation but that such a determination must 
be made from the facts and condition of plant as found by 
examination. 

Also that Alex. C. Humphreys had never testified that a life- 
table developed for a specific case could be applied to other cases, 
and that he had never testified that in any case could a life-table 
be used to estimate actual depreciation. 

Second: In this particular case the estimate of depreciation 
fell to the ground because the assumption as to age of plant was 
not well taken, and so the calculation was in error even if the 
forty years average life could have been made to apply. It was 
shown that the manufacturing plant had been largely rebuilt only 
a few years before and thus its "average age" had been reduced 
far below twenty years. 

I have taken time to cover these two cases at some length 
because they serve well to show what should and should not be 
done in estimating actual depreciation in connection with ap- 
praisals of physical property ; a matter of tremendous importance 
to proprietors and engineers in view of the radical demands now 
being made to satisfy public opinion in connection with the con- 
trol of public utilities. The serious differences of opinion even 
between honest and thoughtful men cannot be removed until an 
agreement is more nearly reached as to the real significance of 
certain terms as, for instance, value, worth, cost, earnings, net 
earnings, profits, net profits, depreciation, reproduction costs, 
reproduction cost less depreciation, etc. One thing we must 
appreciate, value is relative and not absolute. A piece of furni- 
ture bought yesterday, barring accidents, is as valuable to me 
to-day as it was yesterday, and possibly my admiration for it has 
increased so that it has increased in value to me. But to the 
dealer it is second-hand and his value, even for sale, will show a 
large discount from the price paid yesterday. Its service value 
also to me may have increased because I have found by trial that 
it more completely meets my needs than I had at first supposed. 
The public's interest in the plant of a Public Service Corporation 
is its service value; its capacity for efficient and economical 
service. 



314 LECTURE NOTES 

The subject is too broad to cover at this time, but I can make 
one suggestion which is applicable in this discussion and in the 
discussion of all technical questions. If you have any reason to 
think that there will be any question as to the meaning you wish 
to convey by the use of a certain term, use words enough to 
define the term as you employ it. In writing these notes I have 
tried to guide myself by this rule, which may account for some 
repetitions, and yet I feel sure I have not always lived up to the 
rule. 

( To me it is clear that in appraising the physical portion of a 
property to determine its measure in capital, no further deduction 
for depreciation should be made than is measured by the cost of 
restoring the parts to their full efficiency for production, and 
therefore that its condition as to obsolescence, inadequacy, and 
physical decay and not its age should determine the deduction, if 
any, to be made. If there is an accrued depreciation in excess of 
the actual depreciation found as above, the cost of renewal must 
be paid for from income. In the long run no injustice is so done 
to the consumer of the product, because the consumer, first or last, 
should pay for the maintenance of the plant at its original cost, 
provided the profits, whether paid out in dividends or carried into 
surplus, are not found to be unfair; which is tl^e very question 
at issue and to be determined in these rate cases. ) 

If there is a reserve for depreciation which has been created by 
charging to operating cost, such reserve should be deducted as 
accrued depreciation. 

y^In the appraisal of a plant to determine the investment upon 
which a "fair return" (whatever that may be determined to be — 
varying with the general and local conditions) is to be calculated, 
it is not by any means clear to me that there should be any deduc- 
tion for depreciation provided the plant is found to be in a con- 
dition to render efficient service to the public. Certainly no such 
deduction should be made if the income has not been sufficient to 
maintain the plant, provide for accruing depreciation, and afford 
a fair return on the investment. ] 

I have been reminded that this question is one of law rather 
than of expert opinion. It is then to be borne in mind that law 



ACTUAL DEPRECIATION 315 

is largely built on expert opinion, and unfortunately it is too 
often wrongly built on defective expert opinion. 

Many defective decisions have been rendered by the courts 
because those who have been relied upon to furnish expert advice 
have been either incompetent or unfair or both. Certain it is that 
great injustices have been done by decisions rendered by our 
courts in the last few years; these decisions having been based 
upon misleading evidence furnished by experts and the inability 
of the judges through unfamiliarity with the questions at issue to 
estimate correctly the relative weight of conflicting evidence. 
Laymen, certainly including engineers familiar with the prin- 
ciples involved, may feel at liberty to hold an opinion opposed to 
the law of the moment when they find courts of first instance 
reversed by the next higher courts, and these courts in turn 
reversed by the courts still higher ; also when they find the highest 
court of the land, the Supreme Court of the United States, 
finally determining what is the law by a bare majority vote. Also 
when they find in some later case, the majority then reversing 
the majority in a previous case. 

In these involved questions, and especially in connection with 
such matters as we have been discussing, where opinion is still in 
a condition of flux, when we are told that so and so is the law, 
we may venture to suggest that this is an opinion as to the law 
which is to be respected only until some higher authority reverses 
this opinion. 

Those of us who have studied decisions rendered in certain 
cases, even cases before the United States Supreme Court, 
perhaps being familiar with the evidence and competent to judge 
as to the relative weight of conflicting expert evidence, have been 
convinced from the wording of the decisions that the evidence 
had been in part ignored or had been misinterpreted or not even 
understood. 

Much has been said in condemnation of experts and expert 
evidence and much of this criticism has been deserved. As a 
remedy it has been suggested that the expert should be a court 
ofiicer and that only this one expert should testify or advise the 
court on the technical points involved. This appears to have much 



316 LECTURE NOTES 

to recommend it when we study some of the evidence given by 
experts. But, on the other hand, the very conflict of opinion and 
interpretation of data and facts, as voiced by opposing experts, 
open up to the court the questions at issue as nothing else could. 
In other words, the present system with all its weaknesses, gives 
the court at least the opportunity to see both sides of the question 
at issue, provided, of course, that the experts and counsel on both 
sides are competent. 

With these thoughts in mind I venture then to suggest that in 
connection with rate-fixing cases, depreciation should not be 
deducted from plant value provided the plant is sufficiently effi- 
cient to give satisfactory service to the consumer ; and this though 
the opinion may be for the moment in opposition to the weight of 
opinion as to what is the law. . 

Certain it is that the law as interpreted by our courts to-day is 
very different from what it was supposed to be by the interpreta- 
tion of these courts ten and even five years ago. Business men 
who to-day are liable to criminal prosecutions for what are now 
declared to be breaches of the law, made themselves thus liable 
while acting under the instruction of some of the ablest and 
fairest lawyers of the country. Some of these legal advisers, 
among the ablest if not the fairest, are now active in prosecuting 
the very men who made themselves liable under the law while 
under the guidance of their present prosecutors. The prosperity 
of the country as a whole is threatened by the general tendency, 
in answer to public clamor, to attack vested interests. The public 
fail to recognize, as they must sooner or later, that rich and poor 
are interested in capital, directly and indirectly; and the public 
and its law-making representatives fail to appreciate that the 
cause of true reform now requires constructive instead of 
destructive law making. 

We may reasonably hope that there will soon be a reaction in 
favor of a saner general tendency. A great injury has already 
been done and more must follow before normal conditions can 
be restored. While recognizing and striving for the ideal, we 
must recognize the impossibility of attaining perfection through 
human agencies. 



ACTUAL DEPRECIATION 317 

It is a fact to be deplored that while much has come from our 
colleges and universities which has been helpful in the cause of 
true and honest reform, much has also come which has misled 
and deceived. Certain professors of sociology and economics, 
theorists and idealists, lacking practical experience, have assumed 
and been allowed to direct in connection with economic and 
administrative questions of the gravest moment. Many of these 
men would be found incapable of earning a fair living as actual 
producers in the very lines in which they assume to occupy a 
position of leadership. 

Too many of our daily papers and magazines have also been 
at fault in attempting to reform before learning the actual condi- 
tions in operation. Our militant reformers are now preaching 
the doctrine of efficiency. Here again we find an example of 
the loose use of terms to which we are so prone. The term as 
used by these people should be taken to mean as it does in engi- 
neering — the ratio of the useful work performed to the energy 
expended. Then we may say, "Physician, heal thyself," for the 
energy they have expended is out of all proportion to the useful 
work they have performed. 

We may go farther and express the fear that their results 
destructive far outweigh those constructive. Good has been 
wrought, but at a tremendous, unnecessary cost. How then do 
these men dare to preach the gospel of efficiency? 

But I hear you saying. What has this to do with depreciation ? 
If you do not see the connection now, you will do so later. 

Having made reference to the law on the subject, before closing 
let me say that, whatever the law may be, there is no warrant 
in fact for confusing actual depreciation with theoretical depre- 
ciation. Actual depreciation, whether measured by the neglected 
maintenance only or by an estimate of all possible accrued depre- 
ciation, is to be determined, from the viewpoint of the construc- 
tor and operator, by expert examination in detail of the plant, 
and not by the application of estimates of theoretical depreciation 
derived from expectation-of-life tables. 



-DEPRECIATION 

The Accountancy of Depreciation 

In discussing theoretical or estimated accruing depreciation 
some incidental reference has been made to the recording of this 
item of expense on the books of account. 

We may now consider more in detail the accounting steps to be 
taken in connection with this subject. 

First, we assume that a Repairs Account is kept, into which 
are charged the expenditures from current income for the repairs 
and minor renewals. In a scheme of classification which is 
designed to meet the requirements of a manufacturing business 
of any magnitude there should be a General Repairs Account, so 
divided and subdivided as to provide a separate or sub-account for 
each distinctive part of the plant. As the repairs are paid for 
during the fiscal period. Cash is credited and the proper sub- 
repairs account is debited; and so at the end of the fiscal period 
there is a debit balance found against each of these sub-accounts ; 
for our present purpose these balances may be designated respec- 
tively as (a), (b), (c), and (d). At the end of the fiscal period 
the balance to the debit of each of these sub-accounts should be 
carried into the General Repairs Account, and this latter, together 
with the other loss accounts, should be closed into Loss and Gain 
Account. 

For the sake of simplicity we will assume that there are only 
four such sub-accounts, referring to the steam plant, electric 
plant, machine tools, and buildings. As in this case the repairs 
have been debited through the cash-book, the first journal entry 
will be as follows : 

DR. CR. 

General Repairs Account, Dr., (a)-l-(b)-|-(c)-l-(d) 
To Sundry Repairs Accounts as below : 

Steam Plant Repairs Account, (a) 

Electric Plant Repairs Account, (b) 

Machine Tools Repairs Account, (c) 

Buildings Repairs Account, (d) 



THE ACCOUNTANCY OF DEPRECIATION 319 

Collecting the several Repairs Accounts in the General Repairs Account 
— closing the books for the ( months or year) ending this date. 

The posting of the debit item, which is the sum of all the credit 
items, will carry into General Repairs Account the total amount 
expended during the fiscal period for repairs ; and the posting of 
the credit items will close the separate repairs accounts, to be 
re-opened later as required to receive the debits of the succeeding 
fiscal period. 

This journal entry will be followed by another journal entry 
as follows, or the item of general repairs will be included in the 
one journal entry transferring all loss items to the loss and gain 
account : 

DR. CR. 

Loss and Gain Account, Dr., (a)-|-(b) + (c)-|-(d) 

To General Repairs Account, (a)-f(b) + (c) + (d) 

Transferring balance of General Repairs Account to Loss and Gain 
Account, closing the books for the ( months or year) ending this date. 

It can be seen readily there is no narrow limit to the number 
of repairs accounts which may be opened. In common with other 
general accounts, General Repairs Account can be divided and 
subdivided as may be necessary or convenient for the analysis of 
cost and the apportionment of operating expenses in any required 
detail to the several parts of the plant or to the several steps in 
the processes of manufacture. 

We will further assume that to these repairs accounts are 
charged certain of the more important renewals which have to be 
made at comparatively short intervals, such as the ties of a 
railroad, the poles of a telephone company, or the retort settings 
of a gas company. If the annual expenditures for such deferred 
renewals are fairly constant, there is no good reason for including 
such items in the estimate of accruing depreciation. 

In the case of an extended industrial system, especially when 
made up of many separate complete plants, if the annual expen- 
ditures for repairs and renewals serve to maintain the system as 
a whole at its original cost, the renewals being so designed as to 
compensate for obsolescence and inadequacy as well as physical 



320 LECTURE NOTES 

decay, then we may go still farther and say there is no occasion 
for the estimating of any accruing depreciation or including that 
item in our accounts. In another connection I have shown before 
that some of the gas companies of Great Britain completely cover 
depreciation by liberal charging to current maintenance accounts. 

Even in the cases where accruing depreciation is not completely 
offset by these current expenditures for maintenance, almost 
surely certain parts of the plant will be so covered. In such a 
case these-parts should not be included in the expectation-of-life 
table or in the estimate based thereon. Were it not that this point 
is lost sight of too often by certain so-called experts and the 
authorities they advise and influence, it would not be necessary to 
draw attention to such an obvious truth. On the other hand, we 
must recognize that there is depreciation to be reckoned with; 
and, if it is not paid for currently, provision must be made 
eventually for it out of the income. 

It is not sufficiently recognized that the problem in accounting 
as applied to depreciation is to spread the cost of maintenance of 
the several parts of plant with a fair degree of uniformity over 
the years which these parts of plant are in service, so that these 
loss items may not accrue too heavily against the income of any 
year. 

// the renewals as called for year by year and paid for from 
current income meet this requirement, the problem is solved. In 
the case of a system made up of a number of complete plants, 
perhaps of widely varying ages and in different locations, if we 
consider the depreciation of the system as a whole, this condition 
might well obtain. It would not be likely to obtain in the case of 
a single plant, and could hardly do so if the plant were new. The 
final word is that we must be sure that the full investment in 
plant is maintained by one process or another. 

We now come back to the case of a plant which is affected by 
accruing depreciation, the measure of this accruing or theoretical 
loss having been estimated as far as possible or practicable under 
the circumstances. 

As it may be convenient to apportion the charge for repairs to 
the several parts of plant, so it may be convenient to apportion 



THE ACCOUNTANCY OF DEPRECIATION 321 

the charge for depreciation. Let us assume that there is a sepa- 
rate depreciation account for each of the four divisions of plant 
— steam, electric, machine tools, and buildings ; and that there is 
a General Depreciation Account into which the balances of the 
separate depreciation accounts are carried on their way to Loss 
and Gain Account. We will also assume that there is a separate 
asset or plant account for each part of the plant covered by a 
separate depreciation account. 

A direct method of charging up depreciation, in favor with 
many until recent years, was to debit the estimated depreciation 
for the year to Loss and Gain Account and credit the amount to 
Plant Account. 

For this method the journal entry in its simplest form would be 
as follows: 

DR. CR. 

Loss and Gain Account, Dr., $000.00 

To Plant Account, $000.00 

Estimated depreciation of plant for the year ending this date. 

Suppose we decide to account for estimated depreciation by 
crediting to Plant Account; and instead of charging direct to 
"Loss and Gain" we prefer to charge to the separate depreciation 
accounts, and then to collect in the General Depreciation Account, 
and finally transfer from General Depreciation Account to Loss 
and Gain Account. Assume that the estimated depreciation of the 
steam plant is (e), of the electric plant is (f), of the machine 
tools is (g), and of the buildings is (h). Then the first journal 
entries would debit the separate depreciation accounts and credit 
the corresponding plant accounts, thus : 

DR. CR. 

Steam Plant Depreciation Account, Dr., (e) 

To Steam Plant Account, (e) 

Estimated depreciation of the Steam Plant for the ( months or year) 

ending this date. 

And to consolidate the several depreciation accounts in the 
General Depreciation Account the journal entry would be some- 
thing in the following form: 



322 LECTURE NOTES 



CR. 



General Depreciation Account, Dr., (e)H-(f) + (g) + (h) 

To Sundry Depreciation Accounts as below : 

Steam Plant Depreciation Account, (e) 

Electric Plant Depreciation Account, (f) 

Machine Tools Depreciation Account, (g) 

Buildings Depreciation Account, (h) 

Collecting the several Depreciation Accounts in the General Depreciation 
Account — closing the books for the ( months or year) ending this date. 

Then this would be followed by another entry to close Depre- 
ciation Account into Loss and Gain Account as follows : 

DR. CR. 

Loss and Gain Account, Dr., (e) + (f) + (g) + (h) 

To General Depreciation Account, (e) + (f )4-(g) + (h) 

Total estimated depreciation of plant for the ( months or year) 

ending this date. 

Thus, by either of these variations of this method, the book 
value of plant, as represented by the debit balance of this asset 
account (as a whole or subdivided), by the first credit entry or 
entries would be reduced to correspond to the estimated depre- 
ciated value. Then the expenditures as made for renewals and 
replacements of plant would be credited to Cash and debited to 
Plant Account instead of to repairs or renewals (operating cost), 
thus rebuilding the asset account of plant. 

In this connection, because it has not been recognized by 
certain "experts," or if recognized has been ignored, let me point 
to another truth which should be obvious. If estimated accruing 
depreciation is debited to Loss and Gain Account through the 
proper operating accounts and is credited to Plant Account, when 
parts of plant so covered by the estimate are abandoned, the cost 
thereof should not again be charged to operating cost and credited 
to Plant Account. 

This method of crediting depreciation to Plant Account would 
serve to represent plant on the books at its true cost provided 
accruing depreciation were correctly estimated and provided 



THE ACCOUNTANCY OF DEPRECIATION 323 

allowance were made for the depreciation credited to Plant 
Account in advance of the renewals and replacements thus pro- 
vided for. 

As the amounts so credited to Plant Account to cover estimated 
accrued depreciation, in advance of the actual renewals and 
replacements, would be shown on the ledger only in the reduction 
of the debit balance of Plant Account, and so there would be no 
credit balance established to represent the accrued liability, it can 
be seen that this scheme, apparently so simple, is decidedly defec- 
tive and does not provide for easy and prompt analysis. But 
another fault of this method of crediting estimated depreciation 
to Plant Account has been indicated. If this estimate is on the 
safe side, as it should be to cover contingencies, then Plant 
Account is being written down (balance reduced) to a point 
where it may not at any time represent fairly even its depreci- 
ated value. This is well illustrated in the practice of some of the 
old manufacturing concerns, especially in New England, which 
take advantage of prosperous years to debit large amounts for 
depreciation, arbitrarily determined, to Loss and Gain Account, 
crediting these amounts to Plant Account. In many cases this 
has been supplemented by paying for extensions and improve- 
ments from income and charging to repairs or other loss accounts. 
Frequently this course has been pursued until the debit balance 
of Plant Account has been reduced to a nominal sum, perhaps 
$100, the account being kept open only that the plant may be 
represented on the books, irrespective of its real value. In a 
lesser degree this practice has been followed by some of the 
Public Utility Corporations, so that the plant accounts do not 
nearly represent the cost of plant. Many of the gas companies 
of Massachusetts furnish an example of this practice. 

In view of the opinion held by the uninformed public that all of 
our great corporations, and especially the Public Utilities, are 
carrying large percentages of "water," such a statement as this is 
calculated to excite incredulity in the minds of many, including 
some of the college theorists. If the proposal to appraise gen- 
erally the value of our Public Utilities is realized and the work 
is performed honestly and competently, the public will be surprised 



f 



324 LECTURE NOTES 

to find that the physical value of many of these properties, rail- 
roads especially, exceeds their capitalization. 

As the "book value" of cost of plant is one of the elements 
likely to be considered in the valuation of the properties of public 
utilities, it is proper that these "book values" should not be written 
down by excessive charges to depreciation, arbitrarily determined. 
Such a course is doing the stockholders an injustice. 

In the case of a private firm or close corporation, not subject 
to governmental control, where all the proprietors are advised of 
and consent to the policies pursued, and an ultra conservative 
policy in this regard is determined upon, the proprietors have 
themselves only to blame if harm results. As governmental 
control, in one form or another, appears to be spreading into all 
lines of industrial activity, it is important that the books of 
account of all corporations should show the facts as accurately as 
possible, neither for nor against the stockholders. Here it is to 
be borne in mind that the plant accounts can be taken and are 
taken by some as representing the company's full claim for 
original cost. Especially is this true in the case of those who are 
obsessed with the idea that all Public Utility Corporations are 
floating in "water." Then it is to be remembered that cost of 
plant is one of the elements to be considered in valuing a property. 
And it is by no means improbable that the courts may finally 
decide, in the case of plants which have been honestly and com- 
petently built, that, as far as this element of property value is con- 
cerned, cost is the final test. Assume now that the book value of 
plant has been reduced far below cost, the plant in large part has 
to be rebuilt from a depreciation reserve: If the rates for the 
product or service have been based upon this incorrect valuation, 
largely the result of incorrect account keeping, to afford a fair 
return, the rates will have to be increased when the plant is 
restored. 

[li there is a depreciation reserve it is fair to suppose that the 
reserve will be equal to the depreciation as estimated and hence 
if the plant is rebuilt from the reserve, the conditions remain 
unaltered. For in appraising, the depreciation of plant will bcv 
offset by the reserve if the reserve is represented by an asset. ) 



THE ACCOUNTANCY OF DEPRECIATION 325 

We now come to another method of accounting for deprecia- 
tion which keeps the facts more completely in view, and also gives 
more opportunity for revising the estimate of accruing or theoreti- 
cal depreciation as the facts and circumstances from time to 
time suggest. 

Instead of crediting the estimated depreciation to the General 
Plant Account or to the particular plant account involved, the 
amounts when debited to Depreciation Account (or direct to Loss 
and Gain Account) are credited to a liability account, which may 
be designated as Depreciation Reserve Account. 

If the estimated depreciation were not divided up against the 
different portions of the plant, and the depreciation were charged 
up at the end of the fiscal period only, there would be no neces- 
sity for a depreciation account, as the amount could be debited 
direct to Loss and Gain Account and credited to Depreciation 
Reserve, as shown by the following journal entry: 

DR. OR. 

Loss and Gain Account, Dr., (e)-}-(f)-|-(g) + (h) 

To Depreciation Reserve Account, (e)H-(f)-|-(g)-|-(h) 

Estimated accruing depreciation on plant for the ( months or year) 

ending this date, % on $000. 

This entry when posted would carry the item of depreciation 
into Loss and Gain Account as one of the losses of the period, and 
as it is a loss not yet liquidated by the credit to Depreciation 
Reserve, the amount would be set up as a liability. 

If it were preferred to pass this amount first through a Depre- 
ciation Account, the steps would be as shown below in the case 
of a General Depreciation Account divided into a number of sub- 
accounts : 

DR. CR. 

Sundry Depreciation Accounts as below, Dr., 

To Depreciation Reserve Account, (e) + (f) + (g) + (h) 

Steam Plant Depreciation Account, % 

on $000, (e) 

Electric Plant Depreciation Account, % 

on $000, (f) 

Machine Tools Depreciation Account, % 

on $000, (g) 



326 LECTURE NOTES 

Buildings Depreciation Account, % on 

$000, (h) 

Estimated accruing depreciation on several parts of plant for the 
( months or year) ending this date. 

This entry when posted would set up a liability in the Depre- 
ciation Reserve Account equal to the total depreciation, and 
would debit each sub-depreciation account with its share of this 
loss item for the fiscal period. These four debits (loss) balances 
could now be carried into the one depreciation account by the 
following journal entry: 

DR. CR. 

General Depreciation Account, Dr., (e)-l-(f)-l-(g)-l-(h) 

To Sundry Depreciation Accounts as below : 

Steam Plant Depreciation Account, (e) 

Electric Plant, Depreciation Account, (f) 

Machine Tools Depreciation Account, (g) 

Buildings Depreciation Account, (h) 
Collecting the several items of estimated accruing depreciation in the 

General Depreciation Account for the ( months or year) ending this 

date. 

The posting of this entry would balance the sub-accounts and 
debit the total for all four accounts to General Depreciation 
Account. Then to carry this depreciation item into Loss and Gain 
Account as one of the loss items of the period the following 
journal entry should be made : 

DR. CR. 

Loss and Gain Account, Dr., (e)-l-(f)-[-(g)-l-(h) 

To General Depreciation Account, (e)-f (f)-f-(g)-|-(h) 

Closing the books for the ( months or year) ending this date. 

This entry when posted would balance General Depreciation 
Account and carry depreciation as an item of loss finally into Loss 
and Gain Account. 

If it were the purpose to charge up the estimated depreciation 
only at the time of closing of the books, then there would be no 
actual necessity for employing the sub-accounts, nor in fact, the 



THE ACCOUNTANCY OF DEPRECIATION 327 

General Depreciation Account, as the itemizing of the estimated 
depreciation could be shown in the journal entry, thus: 

DR. CS. 

Loss and Gain Account, Dr., (e) + (f) + (g) + (h) 

To Depreciation Reserve Account, (e) + (f) + (g) + (h) 

For the estimated accruing depreciation on the several parts of the 

plant for the ( months or year) ending this date, as follows : 

Steam Plant Depreciation, % on 



$000, 






(e) 


Electric Plant Depreciation, 




-% 




on $000, 






(f) 


Machine Tools Depreciation, 




-% 




on $000, 






(g) 


Buildings Depreciation, 


-% 


on 




$000, 






(h) 



If a Loss and Gain statement is made up each month and the 
required adjusting entries are made in the books each month 
instead of being made only on the statement, then it would be 
necessary to employ a Depreciation Account, and, preferably, also 
the sub-accounts. In that case, at the end of each month there 
would be made a journal entry similar in form to one already 
given, as follows : 



DR. CR. 



Sundry Depreciation Accounts as below, Dr., 

To Depreciation Reserve Account, (e) + (f) + (g)-|-(h) 



12 



Steam Plant Depreciation Account, % on 



?uuu. 






(e) 
12 


Electric Plant Depreciation Account, 


— 


-% 




on $000, 






(f) 
12 


Machine Tools Depreciation Account, 


— 


-% 




on $000, 






(g) 
12 


Buildings Depreciation Account, 


-% 


on 




$000, 






(h) 
12 



Estimated accruing depreciation on the above several parts of plant for 
the month of . 



328 LECTURE NOTES 

The computation for this entry instead of being based upon one 
twelfth of the annual charge for depreciation might be based upon 
the pro rata sales for the month as determined by the estimated 
sales for the year. This last method is particularly appropriate 
in the case of companies selling gas or electric current. 

This method would build up month by month the several depre- 
ciation debits and also the depreciation reserve liability. 

At the end of the fiscal period the several depreciation accounts 
would be collected into the General Depreciation Account by one 
journal entry, and then by a second journal entry, the balance to 
the debit of General Depreciation Account would be transferred 
to Loss and Gain Account and the General Depreciation Account 
balanced. These entries would be the same as the ones already 
shown. 

Or, at the end of the fiscal period, the one journal entry could 
be made to serve the purpose, namely: 

DR. CR. 

Loss and Gain Account, Dr., (e)-l-(f)-l-(g) + (h) 

To Sundry Depreciation Accounts as below : 

Steam Plant Depreciation Account, (e) 

Electric Plant Depreciation Account, (f) 

Machine Tools Depreciation Account, (g) 

Buildings Depreciation Account, (h) 

Closing into Loss and Gain Account the several depreciation accounts 
covering the estimated accruing depreciation — closing the books for the 
( months or year or fiscal period) ending this date. 

The final effect of these monthly debits to the several deprecia- 
tion accounts and credits to "Depreciation Reserve," and the jour- 
nal entry or entries at the end of the fiscal period, would be to 
debit "Loss and Gain" with the total estimated accruing depre- 
ciation for the period and to credit this amount to "Depreciation 
Reserve" ; so establishing a liability equal to the loss charged 
against income. 

It must now be understood that all of these methods in which 
Depreciation Reserve Account is employed lead to the same final 
result. This is to be fully understood before further progress 
can be made. 



I 



THE ACCOUNTANCY OF DEPRECIATION 329 

Another point must be understood. These journal entries have 
in no way affected the Cash Account. Certain cross entries have 
been made which have declared certain losses and charged them 
up to Loss and Gain Account; and as these losses have not yet 
been paid, we have set up a liability account to remind us that the 
loss has yet to be paid, and that this liability must be deducted 
from our assets. 

This point can be made clearer by carrying the depreciation 
scheme one step farther. 

Assume that the amounts reserved against estimated accrued 
and accruing depreciation are to be segregated in a Depreciation 
Sinking Fund; either by depositing in a trust company, there to 
accumulate at compound interest, or in a fund administered by 
the operating company through the purchase of securities, the 
interest on these securities also to be so invested. 

First, we will assume the fund is to be administered by a trust 
company. Then at the end of the fiscal period the amount as 
debited to "Loss and Gain" and credited to "Depreciation Re- 
serve" will be paid over to the trust company. The payment, 
being a cash transaction, will be entered on the credit side of the 
cash-book, something as follows : * 

Depreciation Sinking Fund — Consolidated Trust Co. (e)-f (f )-h(g)-|-(h) 

This entry, as part of the total credit footing, will be posted at 
the end of the month to the credit side of Cash Account in the 
ledger, and will at the time of entry be posted to the debit side 
of "Depreciation Sinking Fund." This in no way changes the 
credit balance to "Depreciation" Reserve — that remains as before, 
showing the liability. Now the Depreciation Sinking Fund shows 
as asset equal in amount to the liability shown in Depreciation 
Reserve Account. Where the liability of "Depreciation Reserve" 
had to look before to Cash and the assets in general to meet its 
liability, there is now established a separate asset, set apart only 
to meet the one liability, the Depreciation Reserve Account. 

We are to remember that the depreciation reserve, in the case 
of a sinking-fund scheme of financing, is dependent upon com- 
pound interest accumulations to make good the estimated accrued 



330 LECTURE NOTES 

and accruing depreciation at the times shown in the expectation- 
of-Hfe table. These interest accumulations must appear on the 
books though they will be in the hands of the trust company 
together with the principal sums deposited at the end of each 
fiscal period. The interest accumulations will not then appear 
as cash transactions as far as the operating company is concerned. 
The facts then must be carried into the ledger through journal 
entries. 

We will assume that the trust company, as it collects interest 
on account of the sinking fund, and so credits interest to the 
fund, notifies the operating company of the fact. A journal 
entry can then be made thus : 

DR. CR. 

Depreciation Sinking Fund, Dr., $000.00 

To Depreciation Reserve Account, $000.00 

For interest credited to Depreciation Sinking Fund by the Consolidated 
Trust Company for the period ending . 

Or, if we prefer to keep the interest accumulations in a sepa- 
rate account, so that the rate of accumulation can be more readily 
checked, the journal entry may be : 

DR. CR. 

Depreciation Sinking Fund, Dr., $000.00 

To Depreciation Reserve Interest Account, $000.00 

In either case, as the reserve is increased, as it should be to 
meet the conditions included in the expectation-of-life table and 
the estimate based thereon, the asset account. Depreciation Sink- 
ing Fund, correspondingly increases. 

Now assume that the operating company administers its own 
sinking fund through the purchase of securities. As the secu- 
rities are purchased and payments made. Cash will be credited 
through cash-book entry and "Depreciation Sinking Fund" will be 
debited, as explained in the trust company case. The detailed 
record of the securities purchased, including rates of interest, 
dates when interest is due, etc., will be kept in a special book 
lettered and ruled for the purpose. 

As interest is received on these securities the detailed record 
will be made in the special book and the cash entries will be made 



THE ACCOUNTANCY OF DEPRECIATION 331 

on the debit side of cash-book, which, being posted, will go to the 
credit of ''Depreciation Reserve Interest." As the uninvested 
interest increases, the fact will be indicated by the sum of the 
credit balances of "Depreciation Reserve" and "Depreciation 
Reserve Interest" exceeding the debit balance of "Depreciation 
Sinking Fund." When the uninvested interest as thus indicated 
has accumulated to sufficient proportions additional securities can 
be purchased. The payments therefor will be recorded on the 
credit side of the cash-book and so be posted to the debit side of 
Depreciation Sinking Fund Account. And so by the purchase 
of additional securities from the interest accumulations, the in- 
terest will compound and the liability accounts, Depreciation Re- 
serve and Depreciation Reserve Interest will be balanced by the 
asset account Depreciation Sinking Fund, plus cash account to 
the extent of any small uninvested balance still remaining in 
Depreciation Reserve Interest Account. 

From this discussion of some of the several ways of charging 
up for estimated accruing depreciation to Loss and Gain Account 
at the end of each fiscal period, it should be apparent that in gen- 
eral it is preferable to credit these amounts to Depreciation Re- 
serve Account rather than to the plant accounts themselves. One 
reason alone should be sufficient warrant for this preference — the 
greater opportunity afforded to check up the estimate of accruing 
depreciation from time to time as facts develop ; for it must never 
be forgotten that this "Depreciation Reserve" is based upon an 
estimate which is dependent upon many unknown quantities. 
Where there is maintained an adequate "Depreciation Reserve" 
balanced by a sinking fund or its equivalent, Plant Account, if 
kept on the basis of cost, can be taken at its face value and no 
deductions should he made therefrom. 

You have now been shown that in addition to the many and 
serious difficulties to be met in attempting to estimate accruing 
or "theoretical" depreciation, there are other difficulties and com- 
plications in connection with the depreciation reserve and sinking 
fund method of financing this depreciation. This complexity can 
be further emphasized by considering the comparative simplicity 
of the process of amortizing by a sinking-fund scheme certain 



332 LECTURE NOTES 

definite payment to be made some years in the future; such as 
an issue of bonds falling due at a certain date ; the premium paid 
on bonds purchased for investment ; the improvements on leased 
land which must be surrendered to the landowner on the expira- 
tion of the lease, etc. Here in each case there is one definite 
amount to be paid at a certain known date. 

As a rather instructive example, the case can be considered of 
amortizing the premium paid on bonds purchased for investment 
to be held until the bonds fall due. In this case there should be 
set aside in a sinking fund such a portion of the interest received 
on the bonds as, accumulating at compound interest, will at 
the time the bonds are redeemed equal the total amount originally 
paid in excess of the face value of the bonds. If this amortizing 
of the premium were not provided for and so the interest were 
all included in and treated as income and so expended, by the time 
the bonds were redeemed we should have impaired our capital 
to the extent of the total amount paid in excess of the face value 
of the bonds. Incidentally it may be pointed out that this does 
not apply to stocks, because they are not purchased under the 
provision that they will be redeemed at a certain date, but that 
they will remain as a liability of the company during its life. If 
the stock is purchased at a premium, it is hoped that it will con- 
tinue to command an equal or a higher premium. Of course there 
is no guarantee to this effect, but that is the risk taken in connec- 
tion with any purchase. 

Before concluding the discussion of this part of our subject a 
few words may be said in regard to the accounting steps to be 
taken when renewals of plant are made as called for by the esti- 
mate on theoretical or accruing depreciation. 

In the first place, it is highly improbable that the payments will 
be made in actual accordance with the expectation-of-life table. 
This failure of agreement between the table and the dates of 
payment should be observed carefully and the estimate of accru- 
ing depreciation corrected accordingly. 

But assuming that the estimate is correct, then, for instance, as 
the parts of plant in Group A have to be renewed the amount 
required to pay therefor would be drawn from the sinking fund, 



THE ACCOUNTANCY OF DEPRECIATION ZZ2> 

and when the payments were made for the plant as renewed, the 
debit would be to ''Depreciation Reserve" instead of either to 
'Tlant" or "Repairs." Assuming that the money were received 
from the sinking fund in the hands of the trust company, the cash 
received would be entered on the debit side of cash-book and from 
there posted to the credit side of "Depreciation Sinking Fund," 
so reducing the debit balance of the latter account. When pay- 
ments were made for plant renewals, the items as paid would be 
entered on the credit side of cash-book and from there posted to 
the debit side of "Depreciation Reserve," so reducing the credit 
balance of the latter account. And so again the credit balance of 
"Depreciation Reserve" and the debit balance of "Depreciation 
Sinking Fund" would be kept in equilibrium by equal reductions 
of each account. 

Now let us consider briefly the accounting steps to be taken if 
the amounts charged to "Loss and Gain" to cover depreciation 
are invested in extensions of plant instead of a sinking fund. 

Here also we could assume that the sums so invested were to 
accumulate at compound interest, the interest in this case to be 
derived from the additional earnings received from the extensions 
of plant paid for from these amounts borrowed from the depre- 
ciation fund. To determine what should be the annual charge for 
depreciation it would be necessary to assume in advance a rate of 
interest to be obtained from the operation of these extensions of 
plant. Such a rate should be assumed as could undoubtedly be 
earned by these extensions. The actual earnings from these 
extensions would be difficult to segregate, and unless a rate were 
assumed independently of the facts to develop later, the amount 
of the annual charge for depreciation could not be determined 
in advance. Then from the earnings it would be necessary at the 
end of each year to credit the "Depreciation Reserve" with the 
annual sinking-fund payment and the interest on the total reserve. 

A simpler way to arrive at this result, as already pointed out in 
connection with the table showing the increasing yearly payments 
through a forty-years' life, as required for a sinking fund main- 
tained by the operating company, is to charge to "Loss and Gain" 
and credit "Depreciation Reserve" the full amount of deprecia- 



334 LECTURE NOTES 

tion without regard to interest. That is, for a ten-years' life, 
one tenth of the cost of plant, for a fifteen-years' life, one fif- 
teenth, and so on. 

The accounting steps to cover this case are the same as in the 
case before covered, up to the point of paying cash into the 
sinking fund. 

Assuming that the several depreciation accounts are kept and 
that the depreciation is charged up at the end of each month, a 
journal entry would then be made debiting the several deprecia- 
tion acounts with their respective portions of the estimated depre- 
ciation and crediting Depreciation Reserve Account with the total 
of these charges. At the end of the fiscal period General Depre- 
ciation Account would be debited with the sum of the balances to 
the debit of the several depreciation accounts and these several 
accounts would be credited with their respective balances. And 
finally, Loss and Gain Account would be debited and General 
Depreciation Account credited with the total estimated depre- 
ciation for the fiscal period. 

When renewals were paid for as covered by the estimate of 
depreciation. Cash v/ould be credited and Depreciation Reserve 
Account debited, so reducing the credit balance of the latter 
account. 

I have stated that extensions and betterments as well as 
renewals might be charged against Depreciation Reserve Account 
provided these extensions and betterments were not capitalized, 
and as a general proposition this is true. 

Two exceptions might here be noted : 

Amounts taken from income and credited to Depreciation 
Reserve Account and invested in extensions and betterments may 
properly be capitalized by issuing bonds against such improve- 
ments, provided the bonds so issued are held as part of the depre- 
ciation fund, the proceeds of the bonds being used for the re- 
newals as called for by the estimate of accruing depreciation. 
In this way the renewals and the improvements are not confused 
with each other, and there is not the same need for explanation 
later when money would have to be borrowed for renewals to 
replace the money borrowed from the depreciation fund for ex- 



THE ACCOUNTANCY OF DEPRECIATION 335 

tensions and improvements. This has to do with the accounting 
only, as the result is the same either way, provided the facts can 
be presented to and understood by those in authority. 

The other exception is one which goes much deeper and has to 
do with the law. While as a general proposition, especially with 
an established business in an established industry, depreciation 
should be met from income and should not be capitalized, there 
are exceptions. If a business is operated during its first years at 
a loss, or if it yields a profit which is insufficient to pay deprecia- 
tion and a fair return, and provided this deficit has not been occa- 
sioned by dishonesty or incompetency, as far as the law is con- 
cerned this deficit can be capitalized, which means capitalizing the 
depreciation wholly or in part. 

A notable example of this is found in the electric light and 
electric railway companies organized in the early days of the 
industry. So rapid were the advances in the art and consequently 
so great the losses through obsolescence, that these companies 
could not have met their depreciation cost from income except 
by charging rates for service which would have effectually pre- 
vented the commercial development of these industries. Where 
it has been necessary for the proprietors to meet the cost of 
apparatus superseded after only a very short life, and this in 
the interest of the public served, the latter should be required to 
pay the cost thereof through the increase of rates made necessary 
by the capitalizing of some of these losses. But we find the 
public and its representatives continually demanding increased 
facilities for transportation, greater convenience and even luxury, 
while also demanding reduced rates, although in many cases the 
existing rates are not sufficient to produce a fair return on the 
investment and the full cost of depreciation. The public and the 
representatives of the public also fail to appreciate how they have 
complicated the situation by giving franchises to competing com- 
panies, although these same representatives and the courts in 
deciding questions of rates do so on the theory that the Public 
Utilities enjoy a monopoly. And they should enjoy a monopoly 
if they are to be subject to regulation of rates. The fact is that 
the history of our Public Utilities has been one of struggle against 



336 LECTURE NOTES 

competition, permitted and even encouraged by the state and 
city legislatures through the granting of "strike" franchises. The 
public, through its representatives, rather than the proprietors, 
is responsible for the additions thus made to the capitalization 
of many of our Public Utilities. 

In a recent case before a Public Service Commission for the 
fixing of rates to be charged by a company distributing electric 
current in one of the largest cities of the United States, the 
decision was against the company, although in the decision it 
was directly admitted that neither the city nor the Commission 
was able to protect the company against competition. In fact, 
at the time of the decision the company was in active competition 
with two other companies distributing electric current. This 
decision was rendered all the more unjust by the fact that the most 
important findings of the Commission were based upon the report 
of the Commission's chief engineer who was also a member of the 
Commission. This man's reports were addressed to himself as 
one of the three commissioners ; and so, as a commissioner, acting 
in a judicial capacity, he reviewed and passed upon his own report 
and recommendations. The approval of this engineer-commis- 
sioner cut the appraisals of the company's experts in half, 
although the latter were men of ability and high standing. The 
appraisals of real estate included in the Commission's findings 
were directly opposed to the appraisals of local real estate 
dealers of standing and were in violation of accepted interpreta- 
tions of law. Hearings were held by the Commission in secret and 
findings were had on the testimony of witnesses whom the com- 
pany had had no opportunity to cross-examine. It is in the 
manifest injustice practiced by such men as this engineer-com- 
missioner, whose one desire seems to be to play to the gallery, 
that the corporations may look for a reaction towards the fair- 
ness bred of sanity. 

In another recent case another Public Service Commission 
attempted to protect from competition a company distributing 
electric current in another of our largest cities. The Commission 
decided that as the company's rates of charge were subject to the 
Commission's regulation, the company should be permitted to 



THE ACCOUNTANCY OF DEPRECIATION ZZ7 

enjoy a monopoly. In this case the consistent action of the Com- 
mission, upon appeal to the courts, was overruled. So it appears 
that my denial of the claim that our Public Utilities enjoy a mono- 
poly (and so should be subject to regulation) does not depend 
for verification upon the history of the past alone. 

If demands are made upon our railways, especially the city 
and suburban electric railways, for increased service involving 
increased expense, and depreciation plus a fair return on the 
investment cannot be covered by the existing rates, the passen- 
gers of the future must pay for the errors of the present or the 
result will be confiscation, wholly or in part. The public and 
many of the public's representatives, fail to recognize that in the 
final analysis, their interests and the interests of the proprietors 
of these utilities (the "public" in great part being the proprie- 
tors) are inseparably involved one with the other. 

Before concluding this discussion of the accountancy of esti- 
mated accruing depreciation, let me in a word or two refer to 
still another way of treating this item of expense on the books of 
account, which can be considered here appropriately because at 
first glance it might be thought to be capitalizing the expenditures 
made against depreciation. Further consideration will show that 
this is not the case, but rather it gives the consumer the full 
advantage of the smaller payments for "Depreciation Reserve" as 
called for by the sinking-fund scheme. 

Assume that "Depreciation Reserve" is borrowed from to meet 
plant extensions and improvements. Then it would be proper 
to capitalize these extensions and improvements, or debit them to 
Plant Account, so increasing capital as represented in the physical 
assets, provided interest is credited to the fund at the rate at 
which a compound interest sinking fund could be established. 
Thus the cost of depreciation would be reduced to the amount 
called for by a compound interest sinking fund, as already fully 
explained, and the company would be permitted to earn on the 
money so borrowed from "Depreciation Reserve" at the rate 
allowed to be earned on the property as a whole, say 8 to 10 per 
cent. The justice of this method can be seen more readily if we 
compare with borrowing from some outside source to meet these 



338 LECTURE NOTES 

extensions and improvements. In the latter case the company 
would borrow at as low a rate as possible, which, by reason of 
the assets and surplus earnings guaranteeing the loan, would be 
lower than the rate of return allowed to the company. Having 
so invested these borrowed funds the company should be allowed 
a return to the limit on this invested capital the same as on the 
capital previously invested. This practically comes back to the 
case of expending the ''Depreciation Reserve" on plant extensions 
and improvements as well as on renewals and including all the 
plant in the inventory for appraisal. The plant displaced by the 
renewals will not be found in the inventory and so actual depre- 
ciation to that extent will be allowed for in the inventory. 

We have now considered in some detail a number of the ques- 
tions involved in the accountancy side of the complex subject 
of "theoretical" or estimated accruing depreciation. 

Although it is in large measure repetition, I feel that it is 
advisable to remind you that these discussions of the perplexing 
questions considered have been from the standpoint of present 
exacting demands ; but that in no case is there any fair warrant 
for applying to the operations of the past, estimates of accruing 
depreciation prepared for the future. 

Especially is it indefensible to assess actual depreciation of the 
present on the basis of expectation-of-life tables not thought of 
at the time the plants were built, and not prepared to cover con- 
ditions, general and specific, then in control. In no case would 
this be a defensible method of appraising actual depreciation. It 
would not be so even twenty years from now on an estimate 
carefully and competently prepared to-day. Certainly, then, it 
is indefensible to apply such a method retroactively. 

In the past there was a general lack of understanding of this 
subject; and furthermore, even if there had been this under- 
standing, in many cases the demands made through the rapid 
development of the art involved and the local situation, would 
have effectually prevented the proprietors from complying with 
the requirements as generally enunciated to-day by Public Service 
Commissions and other authorities. 

On the other hand, in certain industries, especially as developed 



THE ACCOUNTANCY OF DEPRECIATION 339 

in certain parts of the country where the demands had settled 
down to a fairly normal basis, depreciation was more than pro- 
vided for by the investment of surplus earnings in plant, without 
a corresponding capitalizing of these investments. 

Even to-day the provision made against depreciation on the 
"straight line" theory, that is, reinvesting the full estimated cost 
of depreciation without regard to interest accumulations, should 
be considered as doing full justice to the purchasers of product 
or service. In fact, in some cases of undeveloped local under- 
takings and undeveloped arts as applying to all undertakings 
involved, it is yet necessary that there should be some allowance 
made for the capitalizing of losses, depreciation included, until 
the undertakings so develop that, at the rates of charge per- 
mitted, the proprietors are able to pay a fair return on the total 
investment after meeting all expenses and losses. 

In view of these remarks, you may inquire why I have gone into 
the question of accruing depreciation in such detail. 

For two reasons : 

First, because many of you will be called upon to meet these 
questions understanding^ in the interest of your employers ; and 

Second, because men graduating from Stevens Institute should 
be prepared to do their full share in guiding aright the develop- 
ment of the industries. 

We now come to the consideration of the accounting steps to 
be taken in connection with actual depreciation. 

Actual depreciation should be debited to Loss and Gain Account 
(directly or through Depreciation Account or a Depreciation 
Suspense Account) and credited to the proper Plant Account, pro- 
vided it does not fall within one of the exceptions already noted. 
Particular care should he taken not to so treat actual depreciation 
in the accounts if the items under consideration have been 
included in the estimate of accruing depreciation. To illustrate 
this point I will again refer to the uniform system of accounting 
adopted some years ago by the American Gas Light Association. 

I quote at length the explanation of two of the accounts as 
given in the classification book; these explanations are to be 



340 LECTURE NOTES 

studied carefully. The first is an operating account. The second 
is an asset account : 

"B. 8 — Street Mains Abandoned. 

"This account is intended to show the original cost of old mains aban- 
doned or replaced by mains of larger size, less credit for material 
recovered. 

"Note. — In case of old mains replaced by mains of larger size, charge 
this account and credit 'Street Main Improvement' with original cost of 
old main when laid, less present value of material recovered and taken 
into storeroom. If original cost cannot be arrived at, use estimated cost 
based upon present cost of laying the same size pipe. (See Street Main 
Improvement Account.) 

"In case of old main abandoned and left in the ground, charge this 
account and credit 'Extension of Mains* with original cost." 

"Note. — At the end of fiscal year, close this account into 'Distribution.' " 

"Street Mains Improvement. 

"Under this general heading, accounts are to be opened which will show 
the cost of laying new street mains to replace old mains. Separate 
accounts are to be opened for each undertaking. 

Labor and material in the following items : 
Abandoning main when a new main is laid to take its place. 
Cartage. 
City permits. 

Connecting mains so laid to old mains. 
Lamping and watching. 

Laying new mains, when they are laid to replace old mains. 
Paving over any of above work. 

Removing main when a new one is laid to take its place. 
Repairing tools to be used on above work. 
Salary of foreman on above work. 
Taking measurements and records. 
Tools issued for above work, 

"Note. — Separate accounts can be designated by street : for example, 
'Street Main, 6-inch, Market Street' ; or by number. 

"Credit this account and charge Storeroom Account with the present 
value of any material recovered and placed in storeroom. 

"Credit this account and charge 'Street Mains Abandoned' with original 
cost of old main when laid, less value of material when recovered and 



THE ACCOUNTANCY OF DEPRECIATION 341 

taken to storeroom. If original cost cannot be arrived at, use estimated 
cost based upon present cost of laying the same size pipe. 

"Close balance of this account (representing increased cost of new main 
laid over cost of the original smaller main replaced) to 'Extension of 
Street Mains' at the end of the year. (See 'Street Mains Abandoned.')" 

Referring to "B. 8.— Street Mains Abandoned." 
Assume that a main of larger size is required in a certain 
street and the conditions are such that it will not pay to recover 
the old pipe. Then the new pipe will be charged to a plant 
account, in this case named "Extension of Mains." 

As the laying of the new main of larger size causes the aban- 
donment of the old main of smaller size, the addition to the debit 
of the plant account must be only that portion of the cost which 
represents the increase in size of main and the corresponding 
increase in service capacity. As the total cost of the new main 
has been debited to "Extension of Mains," it remains to credit 
that account with the original cost (as well as it can be ascer- 
tained) of the abandoned main. This is effected by the following 
journal entry: 

DR. CR. 

Street Mains Abandoned, Dr., $000.00 

To Extension of Mains, $000.00 

Original cost of feet of 4-inch cast-iron pipe abandoned on Wash- 
ington Avenue between 3d Street and 10th Street. Replaced by a 12-inch 
pipe. 

According to the directions given, the debit balance to "Street 
Mains Abandoned" will be closed into "Distribution" at the end 
of the fiscal year. This is done to get the cost of abandoned 
mains included as one of the year's items of distribution expense. 
Finally "Distribution" will be closed into Loss and Gain Account, 
by debiting the latter and crediting the former account. 

We will now take the same case except that in replacing the 
smaller main with the larger main, the smaller main is recovered 
and stored ready for use in some other street where a smaller 
pipe will meet the requirements. Referring to Street Mains Im- 
provement Account we find the instructions are to open a sepa- 



342 LECTURE NOTES 

rate account for each undertaking. This simply means that to 
keep advised more easily of the cost of each extension and to 
give greater opportunity to compare the actual cost with the 
estimated cost, a separate account shall be kept in each case, the 
balance of each separate account to be closed later into Street 
Mains Improvement General Account. 
The journal entry for this would be: 

DR. OR. 

Street Mains Improvement General, Dr., $000.00 

To Street Mains Improvement No. ZZ, $000.00 

And then would follow the description. 

We will disregard this step for the moment and refer in 
general to Street Main Improvement Account and have it under- 
stood that this is a plant account. 

Reading the explanation of this account we find that the labor 
and material for laying the new main and removing and recover- 
ing the old main is charged through cash to this account. 

Then this account is to be credited with the original cost of the 
old pipe as laid, plus the extra cost of recovering the pipe from 
the ground. The present value of the recovered pipe, as deter- 
mined by market price and condition of pipe, is debited to Store- 
room Account. (This account will be credited later when the 
pipe is taken from the custody of "Storeroom" for use in some 
other street.) 

The amount credited to Street Mains Improvement Account, 
less the amount debited to "Storeroom," will be debited to "Street 
Mains Abandoned." At the end of the year, in closing the books, 
this last account will be closed into "Distribution" and "Distribu- 
tion" will be closed into "Loss and Gain," as already explained. 

Let (j) equal the original cost of the 4-inch pipe as laid, 
(k) equal the cost of recovering this pipe. 
(1) equal the present value of the recovered pipe. 

Then (j)-l-(k) must be credited to Street Mains Improvement 
Account and there must be debited (j) + (k) — (1) to Street 
Mains Abandoned Account and (1) to Storeroom Account. 

Then the first journal entry will be : 



THE ACCOUNTANCY OF DEPRECIATION 343 

DR. CR. 

Street Mains Abandoned Account, Dr., (j) + (k) — (1) 

Storeroom Account, Dr., (1) 

To Street Mains Improvement Account, (j) + (k) 

Crediting to "Street Mains Improvement" the original cost of feet 

of 4-inch cast-iron pipe recovered on Washington Avenue, between 3d 
Street and 10th Street, replaced by 12-inch pipe. Original cost plus cost of 
recovery (j) + (k), minus present value of pipe (1), charged to "Street 

Mains Abandoned," and present value of pipe at per foot (1), charged 

to "Storeroom." 

(I have purposely written this entry in form somewhat differ- 
ent from that formerly employed. Here instead of writing 
''Sundry Accounts as below," followed by the accounts so referred 
to, I write in at once, above the account credited, the two 
accounts debited. I do this, in line with what I have done in 
other parts of my notes, to show that there are variations in good 
practice ; those interested must be prepared to meet variations in 
methods, representing good and bad practice.) 

After the succeeding closing entries are made, as before 
explained, the fixed asset account of "Street Mains Extensions" 
has been credited through "Street Mains Improvement" with the 
original cost of the 4-inch pipe ; "Loss and Gain" for the year has 
been charged with that amount, less the present value of the pipe 
recovered; and the liquid asset account "Storeroom," has been 
charged with the value of the recovered pipe. So the net depre- 
ciation has been charged to "Loss and Gain" and credited to a 
division of Plant Account. 

Another case, before referred to in another connection, can be 
employed to illustrate two of the points I have been trying to 
impress : 

The conditions under which depreciation can be credited 
properly to Plant Account; and 

The fact that certain parts of plant can be fully maintained by 
current expenditures, without recourse to an estimate on accruing 
depreciation. 

I refer to the maintenance of the consumers' meters of a gas 
company, — and this is a typical case. 



344 LECTURE NOTES 

The practice followed by certain companies is to bring all the 
meters in to the repair shop in rotation. The work goes on con- 
tinuously and at such a rate that the complete round of the whole 
system is made every five years. The meters are inspected, 
repaired, their working parts renewed, and the meters tested and 
resealed by official inspectors before being put into service again. 
The meters found to be in such bad condition as not to warrant 
repairs, are condemned and their cost is credited to Consumers' 
Meters Account ; and the same course is taken with respect to all 
meters destroyed by fire or accident. All of this is in addition 
to the repairs and renewals made in answer to complaints. 

New meters purchased to replace those condemned are debited 
to Consumers' Meters Account, a part of Plant Account. New 
meters purchased for extensions are, of course, charged to the 
same account. 

By this system the meters as a whole are maintained at a 
uniform condition of efficiency and so no further charge for 
depreciation is necessary or allowable. 

The journal entry required to account for the meters so con- 
demned might be in the following form: 

DR. CR. 

Consumers' Meters Condemned, Dr., $000.00 

To Consumers' Meters, $000.00 

meters (specifying numbers of each size or referring to detailed 

record in some auxiliary book) condemned in course of inspection, 

repairs and renewal of working parts, for the ( months or year) 

ending this date. 

"Consumers' Meters Condemned" would then be closed either 
direct into Loss and Gain Account, or, preferably, first into "Gen- 
eral Repairs" or "Distribution Repairs," and so into "Loss and 
Gain." 

The credit to "Consumers' Meters" being posted to that branch 
of Plant Account, would reduce its debit or asset balance to corre- 
spond to the inventory of meters. 

A passing reference has been made to the practice of distrib- 
uting by means of a suspense account a large item of deprecia- 
tion loss over a period of years arbitrarily determined. This 



THE ACCOUNTANCY OF DEPRECIATION 345 

method may also be employed in accounting for any large loss 
item which would be found too burdensome if charged against 
the income of any one year. 

By way of illustration, assume that a portion of the steam 
plant has been destroyed by explosion, and that the cost of the 
plant so destroyed was $20,000. Assume that it is desired to 
spread this loss over five years, including the current year. 

Then the proposition is to debit $4,000 to ''Loss and Gain" 
(directly or through some operating account), and to debit 
$16,000 to a suspense account; crediting the $20,000 to Steam 
Plant Account, so reducing or writing down the balance to the 
debit of that asset account. Thus $4,000 is included in the 
expenses or losses of the current year and $16,000 is set up as a 
vanishing asset. 

At the end of each of the succeeding four years Loss and Gain 
Account would be debited and the suspense account credited with 
$4,000, so distributing the loss over the five years ; and at the end 
of the fourth year closing the suspense account by means of the 
successive debits. 

The journal entries might be as follows: 

DR. CR. 

Loss and Gain Account, Dr., $ 4,000.00 

Steam Plant Suspense Account, Dr., 16,000.00 

To Steam Plant Account, $20,000.00 

Crediting to Steam Plant Account the cost of that portion of steam 
plant destroyed by explosion June 4, 1911; charging up one fifth against 
this year's income and providing for distributing the remainder over the 
succeeding four years. 

At the end of each of the next four years, in closing the books, 
the following journal entry would be in order: 

DR. OR. 

Loss and Gain Account, Dr., $4,000.00 

To Steam Plant Suspense Account, $4,000.00 

Charging as part of the year's expense one fifth of the cost of explo- 
sion of June 4, 1911, as distributed over five years. See Journal page — . 
(Referring to the previous entry.) 



346 LECTURE NOTES 

So at the end of the fourth year Steam Plant Account would be 
relieved finally of the cost of this portion of the plant and the 
cost would have been charged against the income of the five 
years. The cost of the new plant would be capitalized by being 
debited to Steam Plant Account. 

A modification of this plan is to charge the cost of new steam 
plant to the capital account, "Steam Plant." After the work is 
completed this cost of restoration is distributed over the five years 
by credits to Steam Plant Account, and debits to Loss and Gain 
Account, so relieving Plant Account of the cost of rebuilding the 
plant and leaving Plant Account still charged with the cost of the 
original plant. 

By the first method Steam Plant Account is relieved of the cost 
of the original plant, but charged with the cost of the new plant. 
By the second method Steam Plant Account is left finally charged 
with the cost of the original plant, and relieved of the cost of the 
new plant. 

This method would be applicable where depreciation was 
covered by liberal charges each year to repairs and maintenance, 
including therein some charges for plant which strictly defined 
would be found to be for extensions or improvements. Here the 
accruing depreciation over and above current repairs and 
renewals would be covered by new plant added which would be 
taken as an offset to the accruing depreciation on other parts of 
plant. 

If, however, a Depreciation Reserve Account and a Deprecia- 
tion Sinking Fund Account were maintained to cover accruing 
depreciation, the problem would be quite different. 

For instance, assume that the part of steam plant destroyed 
had been included in the expectation-of-life table on the basis of 
a twenty years' life, and, say, sixteen years of this life had expired 
at the time of the accident. Not until the end of four years more 
would there be available from the "Depreciation Sinking Fund," 
the cash to pay for the loss. In this case sixteen payments have 
been made into the sinking fund, and four more payments would 
remain to be paid. Assuming that the sinking fund rate of 
interest was 4 per cent, then the annual payment to cover this 



THE ACCOUNTANCY OF DEPRECIATION 347 

part of the plant for a twenty-years' life would be 3.36 per cent 
of $20,000, or $672. Then the sum accumulated for the renewal 
of this part of plant at the end of sixteen years would be only 

r^.-l 1.041^-1 1.873-1 

S=A -=^672 ^ ^^ ^ ==672— -—- =$14,666, leaving a defi- 

r— 1 1.04 — 1 1.04—1 ^ ' ' ^ 

cit of $20,000— $14,666=$5,334. To have accumulated the 
$20,000 in sixteen years would have required an annual payment 
to the sinking fund of 4.58 per cent of $20,000=$916, instead of 
$672. 

Assuming that the plant is rebuilt and that the income of the 
year can support the unexpected burden of $5,334, the $14,666 
could be withdrawn from the sinking fund, the deficit charged to 
"Loss and Gain," the $20,000 credited to Steam Plant Account, 
and the new steam plant as erected debited to Steam Plant Account 
through Cash Account. Thus the Plant Account would be written 
down $20,000 on account of the old plant, debited with the cost 
of the new plant, and so the account would represent the cost of 
the plant as renewed. The balance to the debit of ''Depreciation 
Sinking Fund" would be reduced $14,666 and the balance to the 
credit of ''Depreciation Reserve" would be reduced a like amount; 
and so the accounts would be readjusted to the new condition 
introduced by the accident. The book entries would be as 
follows : The cash received from the sinking fund, $14,666, would 
be entered on the debit side of cash-book and so be posted to the 
credit of Sinking- Fund Account, reducing the balance to the debit 
of that account accordingly. 

Then would follow this journal entry: 

DR. CR. 

Depreciation Reserve Account, Dr., $14,666.00 

Loss and Gain Account, Dr., 5,334.00 

To Steam Plant Account, $20,000.00 

Crediting to Steam Plant Account the cost of that portion of steam 
plant destroyed by explosion June 4, 1911 ; charging up the sixteen years' 
sinking fund accumulations, on basis of twenty years' life to Deprecia- 
tion Reserve Account, and the balance to Loss and Gain Account for the 
current year. 



348 LECTURE NOTES 

Then as payments were made by Cash on the new plant they 
would be entered on the credit side of the cash-book and so posted 
to the debit side of Steam Plant Account. 

If it were not deemed advisable to charge the whole of the 
$5,334 against the income of the one year, the burden could be 
spread over a number of years, say four, by first charging one 
fourth only to "Loss and Gain" and three fourth? to "Suspense 
Account," as before explained. 



ANALYSIS OF DATA 

In this course of lectures on some of the business features of 
engineering practice, I wish to give brief attention at least to the 
vitally important subject of analysis of data. 

In your professional work you will be called upon continually 
to refer to the records of experiences, investigations, and deduc- 
tions of others. You will find it necessary to consult text-books, 
the transactions of technical societies, and other sources of infor- 
mation more or less reliable. 

Then let me urge upon you with all possible emphasis this 
suggestion: Before accepting data, and especially so when some 
definite question is at issue, satisfy yourselves as to its reliability 
and completeness. 

In collecting your evidence you will have to deal with conflict- 
ing, or apparently conflicting, statements. First you should deter- 
mine whether the statements are conflicting; and if they are 
found to be so, there remains to be determined which shall be 
accepted and which rejected. This decision may involve great 
personal responsibility. The sources of the several statements 
should be investigated with care. Frequently this alone will 
furnish sufficient warrant for rejection or acceptance. If the 
conflicting statements emanate from individuals whose person- 
alities are known to you, this knowledge of itself, in many cases, 
should enable you to decide. Sometimes a careful analysis will 
show that there is no real conflict, for the statements will be 
found not to cover exactly the same ground; and, therefore, 
adjustments must be made in advance of comparisons. 

Incidentally in my previous lectures I have pointed out the 
danger of accepting partial or incomplete statements. I have 
told you of instances in my own experience where partial state- 
ments of two or more men, of acknowledged repute as experts 
in their line, had been so combined as to give an apparently com- 
plete endorsement to some process or device. In many of these 
cases my investigations have shown that these statements, which, 
when combined, appeared to offer a sufficient verification of the 



350 LECTURE NOTES 

claims advanced, had not been prepared as the result of coin- 
cident investigations, and, therefore, were defective for the 
building up of a complete record. 

I think of an instance where two such incomplete statements 
were signed respectively by two professors attached to a college 
of engineering of the first rank. One certificate furnished a 
most satisfactory verification of the claims made as far as quan- 
tity of product was concerned, and the other furnished an equally 
satisfactory verification of the claims as to quality. In the pro- 
spectus the adroit promoter so combined these two statements as 
to make it appear that each was the complement of the other. 
These professors, if experts, should have known that the result 
claimed for the process — considering both quantity and quality — 
was impossible of accomplishment ; and yet, they were each will- 
ing to give a certificate as to the isolated results as found without 
considering the claims in their absurd entirety. Later investiga- 
tions made by me proved that if the claimed result as to quantity 
was obtained, then it was impossible to verify the claim as to 
quality ; and if the claimed result as to quality was obtained, then 
it was impossible to verify the claim as to quantity. It was also 
disclosed that the apparatus was purposely designed to deceive. 
These two incomplete reports, so written as not to suggest that 
they were incomplete, were given to a conscienceless promoter 
who succeeded therewith in robbing hundreds of people of their 
small savings. I am sorry to say that I could cite a number of 
such cases from my professional experiences. 

This all indicates that in the analysis of data we should be 
careful to cover by our investigations all the factors involved. 
Isolated statements or even isolated facts should not be accepted. 
Every statement should be read with its context, and, as honest 
and intelligent men, if we quote a statement of fact or opinion, we 
should quote it with the context, and we ourselves should he 
careful to hear in mind the context. 

By way of further illustration let me refer to a matter which 
frequently occasions misunderstanding on the part of the uniniti- 
ated. 

The amount of gas registered by the station meter at the works 



ANALYSIS OF DATA 351 

is compared with the amount sold as determined by the records 
from the consumers' meters, and the difference is loosely described 
as "leakage." The fact is, that there are a number of other causes 
for unaccounted-for gas besides the physical leaking of the gas 
through the mains and services ; such as, difference of tempera- 
tures of registration between the station meter and the con- 
sumers' meters; the condensing in the holders and distributing 
system of the vapors carried by the gas ; incorrect estimating of 
the amount of unmetered gas supplied to street lamps; the im- 
possibility of making the period covered by the registration by the 
station meter exactly correspond with the period covered by the 
reading of the consumers' meters. 

Whether we call that portion of the gas manufactured but not 
sold ''leakage" or "unaccounted-for" is somewhat an academic 
question, but there is another question involved in this matter of 
leakage which is decidedly practical. As a test of efficiency, we 
find comparisons frequently made of gas "leakage" on the basis of 
per cent of output. In one city the "leakage" may be 5 per cent 
of the total output, whereas, in another city, the "leakage" may 
be 10 per cent of the output, and yet the latter, even upon super- 
ficial investigation, may show greater efficiency of plant and 
management. This may be readily seen. Suppose we have two 
companies, A and B, with exactly the same mileage of mains and 
exactly the same per cent of "leakage." A is sending out twice 
as much gas as B ; or, to be more definite, let us suppose that A is 
sending out 200,000,000 cubic feet per annum, whereas B is 
sending out only 100,000,000. Let us suppose, further, that the 
"leakage" in each case is 5 per cent of the output. Then the 
actual amount of gas lost or unaccounted for in the case of A 
is 10,000,000 cubic feet per annum, whereas the loss of B is only 
5,000,000. So we find that with equal mileages of pipes, B's 
"unaccounted for" is only one half that of A, notwithstanding 
the fact that by the statement in the form of per cent the leakages 
are equal. 

To show still more completely that the gas unaccounted for 
of several companies cannot be compared on the basis of per cent 
of output, assume there is a company which has just completed 



352 LECTURE NOTES 

its main system and turned the gas into its mains, but has not yet 
connected up the mains to any of its consumers' meters. In 
this case the total send-out would be "leakage" and hence would 
be 100 per cent; and this would be so no matter how well the 
mains might be laid. 

Notwithstanding the facts here shown there are those in 
authority who make comparisons between companies as to un- 
accounted-for gas on the percentage basis. A certain company 
is found to have a "leakage" of 5 per cent of its output and the 
investigators are, therefore, satisfied that the mains are in fairly 
good condition and that the management in this respect is satis- 
factory. In another case the "leakage" is found to be 10 per 
cent and it is therefore assumed that the mains are in unsatis- 
factory condition. Notwithstanding these surface indications 
to the contrary it is quite possible that the plant showing the 
10 per cent unaccounted-for may be in better physical condition 
than the plant showing the 5 per cent loss. The large per cent 
of unaccounted-for may, of course, indicate that the amount sold 
is less than it should be, and therefore the sales department may 
be at fault, but the efficiencies of the distributing department and 
the sales department are not to be confounded. 

Having seen that comparisons by per cent should not be made 
in comparing the unaccounted-for of several companies, it is to 
be understood that such comparisons are correct and necessary 
when made between different periods of the same company. If 
for the year 1911 the per cent of unaccounted-for is more than it 
was for the year 1910, investigation as to the cause is in order. 

The intelligent analysis of data is required when we are 
attempting to make comparisons between the efficiency of man- 
agement of the several departments of a single concern. In con- 
nection with my talks on accounting, I have tried to impress 
upon you the fact that if we are to obtain the most economical 
management through the many steps included in operation, we 
must be able to determine through a systematic statement of 
items of cost exactly where there is room for improvement and 
where we may, at least for the present, be satisfied with the 
result obtained; so, in connection with our present subject, we 



ANALYSIS OF DATA 353 

must be prepared . through a careful consideration of all data 
available to determine as to the relative efficiency of the manage- 
ment of each of the several departments of any business in which 
we may be concerned. 

I am reminded of something that happened some years ago. I 
shall not go into the details, but it is sufficient to say that in con- 
nection with the arguments made from time to time in favor of 
an improved form of retort furnace and setting, an engineer of 
the old school, in charge of one of the largest plants in the 
country, repeatedly stated that his "benches" of antiquated 
design, cost him much less money to install and were giving 
results equal in economy to the results claimed for this new and 
more expensive form. These works later came under my man- 
agement and I then found that there was apparently a ''leakage" 
of about 33 per cent of the output. Investigation proved that 
the mains were in better condition than any other part of the 
plant and that the superintendent of distribution was the most 
efficient official in the company's service. The explanation of 
the claim for efficiency of these antiquated retort settings and 
furnaces was suggested by the excessive "leakage" in connection 
with an efficient distribution system, and the discovery that the 
amount of gas manufactured was arrived at by estimate. There 
was not sufficient station meter capacity to register the total 
amount made at the time of maximum output, so from time 
to time, when the capacity of the works was not taxed, test runs 
were made, the gas being measured in a station meter of sufficient 
capacity for the amount of gas then made. The total coal car- 
bonised was credited with the rate of production established by 
these experiments. Further investigation proved that these 
experimental or test runs were entirely unreliable as a basis of 
estimate. As soon as the gas was correctly measured, the state- 
ment of gas produced was materially reduced; and so the state- 
ment of the amount sent into the mains was reduced, and in turn 
the per cent of leakage was reduced. Thus it was discovered 
that the management of the works was much less efficient while 
the management of the distribution department was much more 
efficient than the records had indicated. Furthermore, it was 



354 LECTURE NOTES 

found that the claim made that the old-style furnaces and retort 
settings (''benches") were as efficient as the improved (regenera- 
tive) benches was entirely without warrant. 

When we are called in as engineers to investigate any proposi- 
tion as to the worth of a plant or a business, we at once have to 
depend upon our powers of analysis. A man who is not capable 
of analysing data fairly and intelligently is worthless as an 
investigator. I believe I am correct in saying that in a majority 
of the many cases I have investigated, where specific claims had 
been made as to quantity and quality of product, upon going to 
the works to investigate, it has been found that there were no 
means on the ground for completely measuring quality, or 
quantity, or both, and that the extraordinary results claimed had 
been derived from more or less elaborate systems of estimation 
in which the wish was father to the claim. For instance, I call 
to mind one case where the most extraordinary statements had 
been made as to the quantity of gas produced from a given 
quantity of coal. These statements had been widely accepted and 
many men of the highest standing in the business world had been 
induced to invest in the company controlling the process. Cer- 
tificates had been furnished by engineers who were supposed to 
be capable and honest. When we undertook the investigation, 
we found that there was no station meter for measuring the 
quantity of gas produced, the measuring being done by noting 
the rise and fall of the gas holder, and this without correcting for 
change of temperature, which amounted sometimes to as much 
as 40° Fahr., and without due allowance for the fact that gas 
was going into and going out of the holder at the same time. 
Furthermore, it was found that the amount of coal used had been 
determined by the use of small platform scales and that there 
was no evidence that the coal, as supplied to the apparatus, had 
always been weighed. The records of ordinary laborers had been 
taken in this case. Another factor tending to vitiate the coal 
records was the fact that gas was made during two "shifts" — 
day and night — there being a strong rivalry between the fore- 
men of the two shifts, each wishing to make the better record for 
coal and oil used. When we came to check up the coal pile by 



ANALYSIS OF DATA 355 

the treasurer's books, we found that nearly twice as much coal 
had been used as had been included in the attractive statements 
of cost. 

Again, in the case of gas process investigations we have to test 
the claims as to quality by accurate measurements of candle 
power and calorific value. I call to mind a case, and a most 
important one, where the gentleman whom I was assisting had 
come from Europe for the express purpose of investigating the 
claims made for a certain process. The investigation was carried 
on through a number of different works. At one of these, when 
we came to use the photometer to determine the candle power of 
the gas, we found that the sight box could be moved through a 
range of four candles without making any marked difference in 
the distinctness of the image on the disc; and, yet, this photo- 
meter was in charge of a man who had an established reputation 
for ability in laboratory observations. 

I think of another instance where a certain engineer had been 
for years claiming that, by his method of scrubbing and condens- 
ing, the gas acquired or retained an additional illuminating value 
of two candles. Later these works came under my direction, and 
I found that the photometer upon whose accuracy these claims 
for increased efficiency depended was out of adjustment at a num- 
ber of points ; the candle balance was non-sensitive, and the 
Bunsen disc had been in use for about ten years and was so dis- 
colored as to have outlived its usefulness. As soon as the photom- 
eter was re-equipped and re-adjusted, we were unable to detect 
any increase in candle power due to this special method of scrub- 
bing and condensing. Yet these claims had been accepted on the 
reputation of the inventor and considerable apparatus had been 
sold upon his unsupported statements. 

In making our comparisons on the relative cost of product or on 
relative efTficiency of plant, we must be careful not to magnify the 
importance of any one item at the expense of any other item, or, 
worse yet, at the expense of all the other items. While the case 
must be considered with regard to each of the individual items, we 
must also consider the case as a whole. 

Again, I am reminded of an experience gained in connection 



356 LECTURE NOTES 

with an effort to eliminate an item of waste due to heat escaping 
with the products of combustion. We devised an addition to the 
apparatus which was intended to recover a large portion of this 
heat. At first the result was most encouraging and we were appar- 
ently making a satisfactory saving on each thousand feet of gas 
produced. At the end of six months, however, the repairs on this 
additional apparatus had increased until the cost for repairs was 
twice as much per thousand as the apparent saving. 

In making our investigations we should be sure that the instru- 
ments used for our measurements are completely adjusted and 
standardized. For instance, in the case of gas investigations we 
should be certain that the means employed for measurement of 
volume are correct and that the photometer, which is used for the 
measurement of candle power, is accurate. We should, still 
further, be positive that the gas we are measuring is the gas that is 
being produced. I recall an instance where, after two weeks of 
hard work, the men engaged on the investigation found that the 
gas they had been measuring for candle power was taken from 
another pipe than the one they had supposed. In other words, the 
measurements for volume were correctly taken but the measure- 
ments for quality were made on gas produced by another appa- 
ratus. 

I will give you another instance by quoting from a letter 
received not long ago from an eminent engineer : 

Recently we had occasion to make a fuel test and I found that the man 
in charge failed to test properly the scales before use. 

He was weighing wagons of approximately 1800 pounds each. The test 
he made of the scales was to stand a man in the center, get his weight, 
stand him at each corner and get his weight, and find that each time the 
weight of the man was shown to be the same as when he weighed on the 
standard scales. This was regarded as satisfactory evidence that the 
scales were correct. I believe that further it was determined that the 
scales worked freely — turning for a small additional weight, and that 
everything was clean about the pit. 

After the test had gone on for some time it was found that the scales 
were not weighing the same as another set of scales, and it was ascer- 
tained that the platform and its supports were not sufficiently rigid and 
had been bent under the 1800 pounds weight. 



ANALYSIS OF DATA 357 

Particularly I wish to warn you against the blind acceptance of 
published data, and especially comparative tabulations issued by 
government authorities. These tables are the favorite ammunition 
of the ''experts" trying to demonstrate a theory they have adopted 
in advance. When we consider that the material entering into 
these comparative tables usually has been collected from many 
sources, and that those who have furnished the material have been 
guided by varying instructions, or by varying interpretations of the 
same instructions, it is easy to understand why the figures in the 
same column cannot be accepted safely for comparison. 

In some of my previous lectures I have incidentally shown 
that the avoidable and unavoidable variations in the interpreta- 
tion of a uniform system of classification of accounts, lead to 
results which are not fairly comparable in the absence of indi- 
vidual explanations. I have also shown that certain "experts" 
have interpreted the tables issued by government authorities to 
develop testimony directly opposed to the facts. I particularly 
remind you of one case in which a certain professor developed 
a cost of thirteen cents per thousand feet of gas when the fact 
was that the cost as derived from a complete analysis of all the 
tables was forty-three cents and the chairman of the com- 
mission responsible for the tabulation endorsed my statement to 
that effect. The saddest part of this incident was that this 
"expert" persisted in and published his false statement after the 
correction had thus been officially endorsed. 

In short, in all of our investigations we should be sure that 
the methods we are employing are giving correct and complete 
statements of fact and we should never accept any other person's 
say-so if there is any possible way of investigating for ourselves. 
When we do accept the statement of someone else, that fact 
should be shown. If we sign a report, it should be because we 
have personally verified all the statements contained therein, or 
we should qualify our statements, where necessary, by stating 
our authority. 

Or to state it more briefly : 

Be thorough. 

Do not be led. 



358 LECTURE NOTES 

Keep your wits about you. 

Use your common sense. 

State what you know. 

Show in detail (by addenda if preferable) the steps taken in 
your investigation and the bases for your deductions. 

If your report is not complete, be very sure to state that fact, 
pointing out wherein it is incomplete. 

Note. — I refer you particularly to the lecture by Mr. H. P. 
Gillette reprinted in Part III. Note particularly his remarks on 
percentages to be included to cover omissions, contingencies, and 
profits. 



SPECIFICATIONS, ESTIMATES, CONTRACTS, AND 
APPRAISALS 

Incomplete as is this collection of Lecture Notes, failing as it 
does to touch specificially upon some important business features 
of engineering practice, I feel that some definite reference to 
specifications, estimates, and contracts, and incidentally to apprais- 
als, must be included. 

In my talks I have frequently made incidental reference to this 
branch of our subject, and especially when describing and illus- 
trating the use of the statistical and auxiliary books which, com- 
bined with the regular books of account, should provide a com- 
plete record of the transactions of an industrial concern. 

First, we have to bear in mind that we must consider this 
subject from the standpoint of the buyer as well as that of the 
seller. Some of you as contracting engineers or manufacturers 
will have to submit to the stipulations contained in the specifica- 
tions and contracts prepared for your guidance and control. 
Some of you after so contracting may sublet parts of your con- 
tract to others and so become interested in the preparation of 
such specifications and contracts as will in turn guide and control 
those whom you are bringing in to share your responsibilities. 
And some of you as purchasers of plant will have to control the 
seller. 

Again, some of you as consulting engineers may have to occupy 
a more neutral position in representing the purchaser, or standing 
between the purchaser and the manufacturer or contractor. 

So what I have to say should be capable of fair application by 
either party to a transaction in which is involved a specification, 
an estimate, and finally a contract. 

In connection with any piece of work to be performed the first 
thing required, preliminary to a contract, is that the exact char- 
acter of the work shall be fully and explicitly defined. 

This calls for the preparation of exact and comprehensive 
specifications and engineering drawings. As to the drawings 



360 LECTURE NOTES 

I know that your technical training has been fully cared for in 
other of our departments; and yet, before passing on, let me 
emphasize as an important feature of engineering practice that 
all engineering drawings should be completely self-explanatory 
and should be checked up in every possible way before they are 
employed in connection with a specification accompanying a con- 
tract. Unfortunately, it is too common an occurrence to find 
that the several parts of a drawing or set of drawings do not 
support each other as to dimensions or features of design, or 
both. 

For a piece of work of any importance, specifications should 
be prepared carefully and made to agree in every particular with 
the engineering drawings. It will be found frequently that the 
effort to bring about this agreement will indicate the necessity 
for modifying the drawings or the specifications, or both. 

For the moment, I cannot think of any one detail included in 
this portion of the engineering field that is of such vital import- 
ance from both the technical and the commercial standpoints as 
this preparation of drawings and specifications, complete, com- 
prehensive, and exact in all necessary details and in perfect 
harmony with each other. 

In the case of work of any magnitude, only by such complete 
planning ahead can the best possible result be obtained from the 
minimum of capital expenditure. Here it is to be seen how the 
technical and commercial features of engineering practice are 
interwoven from the very beginning of any industrial under- 
taking. 

Where a certain class of work is being repeated frequently, 
with comparatively minor modifications to meet local or special 
conditions, standard drawings and standard specifications should 
be developed. As soon as any difficulty appears in connection 
with any one undertaking from which we can gather experience 
for future application, the standard drawings and specifications 
should be modified; or, if a general modification is not deemed 
advisable, notes should be made for our guidance in any similar 
future case. 

If in the same business a number of lines of work are followed, 



SPECIFICATIONS AND CONTRACTS 361 

as many sets of standard drawings and specifications should be 
prepared. 

For each special line an estimate book should be developed in 
which there shall appear every item that experience has shown 
will be required. 

This should be supplemented as often as experience shows us 
(which at first will be very often) that in our previous estimates 
some items were omitted. 

The cost of each specific item must include the cost of placing 
the material and the men on the ground where the plant is to be 
erected, or there must be included as separate items the cost of 
transportation, including freight, carting, insurance, etc. In 
making up the items of an estimate we must be careful to see 
that there is no gap between the items which cover transportation 
and the items which cover erection. Not infrequently, actual 
cost exceeds estimated cost because material has to he stored and 
rehandled after delivery and before erection or because wages 
have to be paid to men waiting for the opportunity to commence 
their work. 

A competently prepared and maintained estimate book is worth 
many times its weight in gold. The accumulated records and 
special data of such a book, modified and corrected to conform to 
the teachings of experience, is of the utmost value in the prepara- 
tion of specifications and estimates for future undertakings. 

After including every item that can be identified as a necessary 
part of the construction, there is another which should never be 
omitted — an adequate allowance for omissions and contingencies ; 
for no matter how capable, careful, and conscientious we have 
been to include separately all construction items, there are sure to 
be some omissions and there are sure to be unforeseen contin- 
gencies. In every engineering undertaking in which variations 
are introduced through change of location or other of the limiting 
conditions, there will be required a change in our specifications. 
Furthermore we must include an item for contingencies and 
omissions because we cannot determine in advance the cost of the 
unavoidable chances which enter into the performance of every 
piece of engineering work of any importance. Some engineers 



362 LECTURE NOTES 

provide for this item by making a liberal estimate of cost on each 
important item. I prefer to place against each item what I believe 
will be its cost as exactly as I can estimate it on present market 
conditions and then add one item for omissions and contingencies, 
say in ordinary cases, as a minimum, 10 per cent of the total cost 
of all the specific items. Before deciding what per cent shall be 
included to cover omissions and contingencies the situation should 
be studied carefully, both in detail and in general, especially with 
regard to contingency chances. The fact is, that in many under- 
takings where certain broad assumptions had to be made as to 
controlling conditions, omissions and contingencies have absorbed 
the allowance therefor and the estimated profit, and then left a 
deficit. Generally these excessive expenditures do not add to the 
service value of the completed plant, though they do add to its 
cost and the necessary capitalization. 

Even if we exercise all possible care, intelligence, and trained 
judgment to include, and provide adequately for, all specific items 
of cost, this item of omissions and contingencies cannot be 
omitted safely; and in certain special cases it must provide for 
elements so uncertain in their character that a considerable risk 
must be taken or a large amount must be included to ensure 
safety. If the estimate is prepared as the basis for a competitive 
bid on contract work, such a necessarily large item for omissions 
and contingencies may be a handicap in our efforts to secure the 
contract ; for one or more of the other bidders may, either through 
incompetency, recklessness, or dishonesty, neglect to include any 
or a sufficient allowance for this item. In case of close competi- 
tion, some dishonest contractors will deliberately omit this item, 
intending, if the cost goes against them, to escape by one means 
or another from the full force of the contract. 

In such cases, the honest and prudent contractor should not 
allow himself to be influenced by fears as to what his competitor 
may be willing to do. 

In addition to omissions and contingencies there are other items 
which should be included in the final estimate. If the estimate is 
being made by the contractor, then before he can calculate on any 
net profit, which ought to be not less than 10 per cent, he must 



SPECIFICATIONS AND CONTRACTS 363 

allow for the omissions and contingencies as before explained, 
and he must also allow for certain items of cost which are 
variously grouped under the head of "Overhead Charges," "Ad- 
ministrative Expense," "Undistributed Expense," etc. It needs 
no argument to show that in addition to the cost of material and 
labor, there will be the cost of salaries to engineers and assistants, 
including draughtsmen, timekeepers, inspectors, etc. Then there 
will be the pro rata of salaries of the officers and other employees 
whose time is devoted to the business as a whole, and also the 
other expenses of the general organization. Even in a concern 
engaged in the contracting business in a large way, this undis- 
tributed expense will amout to 10 to 15 per cent of the total dis- 
tributed expense. Not infrequently I have known it to run as 
high as 25 per cent and occasionally as high as 50 per cent. 

This is parallel to the case of "Shop Cost" and total cost, 
involving a difference sometimes much underestimated, and so 
leading to financial disaster. Before a net profit can be found 
for the manufacturer, in addition to shop cost, there must be 
included the cost of selling and delivering the goods; the pro 
rata of all general salaries and other administrative expense; 
the loss from uncollectible accounts ; and depreciation of manu- 
factured stock, assuming that depreciation of plant and raw 
material has gone into "Shop Cost." 

In the same way, in a contract business, each contract must 
bear its share of the general expenses, and the engineer must 
include these in his estimate unless it is understood by those 
higher in authority that all items of cost beyond the actual con- 
struction will be added by the general management. 

Assuming now that the estimate under consideration is made 
by the company which employs the contractor, it by no means 
follows that because the contractor has included his administra- 
tive charges that there will be no occasion for the former to 
include charges of a like character. Before the contract can be 
let plans and estimates must be prepared, and after the contract 
is let there will be need of engineering direction and supervision. 

Also, if the undertaking is a new one, before the engineer's 
plan has been considered in detail, there will probably have been 



364 LECTURE NOTES 

the expenses incurred by a preliminary organization. Whether 
included by the engineer or by the general management, there 
are many items of cost which must be considered. One item 
stands out prominently — interest during construction. All the 
money spent prior to the time when the plant can earn a return on 
the investment is entitled to a return. For instance, assume that 
the cost is covered wholly by bonds ; as the bonds are sold to pay 
for the plant, interest begins to run and so becomes part of the 
cost of plant. This is easily understood when we consider the 
case of a modern office building which even under the present 
extraordinary conditions of rapid construction will take a year 
or more to build. After the building is completed the rent roll 
yet has to be built up. Even if only a year is required, and 
assuming that the payments are made uniformly throughout the 
year, there will be a charge of one half year's interest on the 
total cost of construction. The chances are that on the land the 
interest charge will extend over a considerably longer period. 

In the case of an industrial plant the land must be purchased 
early in the undertaking. Interest and taxes will commence to 
run from the day title is taken, and both of these items will 
increase as the work progresses. Again, the land probably will 
have to be prepared for the plant to be erected thereon. It may 
be that wharves, railroad sidings, sewers, grading, and roads will 
have to be paid for. The money spent for all preparatory work, 
whether physical or otherwise, is just as real as the money which 
is spent for brick, steel, and labor, and all of it draws interest. 

Unfortunately, it too often happens that in promoting a new 
undertaking the prospective profits are calculated on the engi- 
neer's estimate which omits many of these items ; some of which 
he is directly responsible for, such as omissions, contingencies, 
engineering, supervision, etc. ; interest, which he is not directly 
responsible for as it falls under the head of financing, but the 
measure of which he is best able to calculate, depending as it 
does upon inventory cost and time to be consumed in construct- 
ing; and items which the engineer may be in no way responsible 
for, such as preliminary organization, legal expenses, administra- 
tive salaries, etc. It would be far better for the engineer, as 



SPECIFICATIONS AND CONTRACTS 365 

placing him in a position of greater responsibility, if he either 
included all of these items in his estimate, or at least drew atten- 
tion to them. If he is called upon to make an estimate of pro- 
spective profits, he should either procure a statement from the 
general management of the amount to be included for all items 
outside of his department, or he should state distinctly that his 
estimate is to be supplemented by the inclusion of these items. 

The failure due to division of responsibility to so cover the 
total cost of establishing an undertaking ready to earn on the 
total investment has been the cause of many schemes failing to 
make good the claims of their promoters. 

Without here attempting to specify the amounts or percentages 
to be included for each of the items, — for these must depend 
upon the conditions as found — I give by way of warning and 
reminder the items which are too liable to be omitted by the 
inexperienced and the careless : 

Omissions from design and specifications. 

Incidentals and petty expense items. 

Contingencies in connection with design and construction, 
including erecting parts out of sequence due to inability to control 
deliveries, strikes, weather, etc. 

Other losses caused by strikes. 

Insurance against casualty — employees and public. 

Hazard of extraordinary casualty not covered by insurance. 

Legal and other organization expense. 

Engineering — including design and specifications. 

Superintendence — including supervision and inspection. 

Interest on all expenditures — say for one half of time covered 
by construction, making extra allowance for real estate if 
necessary. 

Taxes. 

Assuming that these are added to the estimate of the company 
employing the contractor, the contractor's "Overhead Charges" 
and profit must still be covered and should appear in the con- 
tractor's contract price. If he works on a percentage basis they 
will appear in his statement of cost. 



366 LECTURE NOTES 

Beyond all these items there are two of very substantial pro- 
portions yet to be considered, which have to do with the financing 
of the undertaking: 

First, is the cost of getting the capital. If the cost of plant is 
covered wholly or in part by bonds, a discount must be allowed 
to the buyer. The rate of discount depends largely upon the 
rate of interest. Bonds on a new enterprise are seldom sold at 
par; a discount of 15 per cent, going partly to the bankers and 
partly to the investors, is not excessive. 

VThen there is the working capital, for which there may be 
required an amount equal to a considerable per cent of the fixed 
capital, depending upon the nature of the business. In some 
manufacturing businesses, the product being varied in character, 
and calling for the carrying in stock of large quantities of raw 
material and manufactures, the working or liquid capital required 
may be 10 per cent and even more of the fixed capital. If the 
working capital is not sufficient, and the concern carries a large 
floating debt, there will be the interest on loans to pay and the 
charge against the earnings will J^e increased by inability to take 
full advantage of trade discounts.) 

Then for these two items alone there may be required 25 per 
cent of the total cost of plant and organization. For the ''Over- 
head Charges" previously described there may be required 25 per 
cent of the direct cost of the inventoried plant. Thus it is seen 
that to the engineer's estimate, if based only upon the items of 
material and labor scheduled in the estimate, it may be necessary 
to add 50 per cent in estimating the total investment ; and even 
this allowance may be exceeded easily. 

We may now turn to a brief consideration of matters connected 
with the work of construction as it progresses. 

From the estimate book such as I have outlined, another book 
can be developed which may be employed to the greatest advan- 
tage in the actual performance of the work. This may be desig- 
nated as the Contract Record. As work under a contract pro- 
gresses, especially if the work is being executed at a point far 
removed from the home office, it is of vital importance that those 



SPECIFICATIONS AND CONTRACTS 367 

who are responsible at the home office for keeping the resident 
engineers supplied with the necessary material and men, should 
constantly have before them a record, complete to date, of the 
ordering and forwarding of material and men and of their 
arrival or non-arrival on the ground. This book should have 
columns so prepared that against each item can be recorded all 
the various steps taken between the ordering of the material and 
the completion of the work. It is therefore important that spaces 
should be provided for necessary notes in regard to working draw- 
ings, and modifications and additions thereto, the necessity for 
which may develop as the work progresses. 

The resident engineer should be notified of all drawings, 
material, and men forwarded, and he should be required to 
acknowledge promptly their receipt. All these steps should be 
noted in the Contract Record. The notifying of the resident 
engineer may well be done through carbon copy books, so that 
we may be sure that the original sent to him is an exact duplicate 
of the carbon copy retained in the home office. These carbon 
copy books may be used conveniently for illustrating by sketches 
the minor details required to modify or further explain features 
of construction on which questions have arisen during the pro- 
gress of the work and which have been referred to the home 
office for further explanation or decision. Where the change 
involves the seller of material or manufacturer of parts, the same 
sketches in triplicate should be employed. The orders for 
material should also be made out on carbon copy books so that 
one copy may be sent to the concern from which the material is 
ordered, one copy to the resident engineer in charge of the erec- 
tion, and the third retained in the home office. 

As I have said, every one of these steps, as they are taken, 
should be noted in the Contract Record according to a pre- 
arranged system. The final vertical column in this record should 
show the total cost of each item, there being sufficient other 
columns to show the details of each of these items. 

When the contract is completed, the cost, as shown by the Con- 
tract Record, should be checked up with the treasurer's books to 
determine whether the cost, as shown in this book which is to 



368 LECTURE NOTES 

guide in the making of future estimates, exactly corresponds as to 
total cost with the figures shown in the regular books of account. 
To the inexperienced student it may seem strange that I take 
the time to make this point; but this is vital in the operation of 
such a scheme as I have now barely outlined. It is true, unfortu- 
nately, that here and in many other directions, the statistical and 
auxiliary books of an industrial concern are not always made to 
balance with the regular books of account. Often these two 
classes of books are kept in different departments — the regular 
books of account in the Commercial Department and the auxiliary 
books in the Engineering or Construction Department. And, not 
infrequently, sufficient friction or jealousy exists between these 
two departments to prevent that loyal cooperation so absolutely 
necessary for the securing of the best results. The man, then, 
who is responsible for the business as a whole should see to it 
that this cooperation is developed and constantly maintained. 
But if the manager is a technically trained engineer who regards 
bookkeeping as something below his dignity as a professional 
man, he will not be ready in the first place to call for such co- 
operation nor, in the second place, will he be competent to ensure 
it by proper supervision and direction. 

After the Contract Record cost has been found or made to 
correspond with the treasurer's cost, the former should be com- 
pared item by item with the estimated cost. This comparison, if 
made carefully and intelligently, will assist greatly in developing 
accuracy in estimating, and incidentally will demonstrate the 
necessity for including the items for omissions and contingencies 
and overhead charges. 

Now let us go back to the more specific consideration of the 
preparation of the specifications. 

From what has been said it can be seen that an Estimate Book 
and a Contract Record (possibly combined) such as I have out- 
fined can be employed most usefully in the preparation of speci- 
fications, provided the concern which employs these books is 
responsible for the preparation of the specifications. Such is not 
always the case, but often it is so. 

The consulting engineer should so record all the data collected 



SPECIFICATIONS AND CONTRACTS 369 

in the course of his supervisory duties and should be keen and 
diligent to check his theories by the practice of those executing 
the work. Particularly the contractor will find these records 
necessary as a guide in bidding on work. Furthermore, as he will 
frequently be called upon to prepare the final detailed specifica- 
tions and drawings to be attached to the contract, the keeping of 
these records most systematically becomes a matter of the greatest 
moment. 

If bids are to be called for by a concern which is not informed 
in detail as to what should be required under the proposed con- 
tract, the probabilities are that a consulting engineer will be called 
in to advise and direct; or the work will be put at once in the 
hands of some contracting specialist who, by his integrity, 
common sense, and professional ability, has earned for himself 
the kind of reputation which the broad-minded business man 
recognizes as the best guaranty of a final satisfactory result. 

Suppose now an estimate has been prepared as the basis for a 
bid, this bid to be accompanied by a specification in more or less 
detail according to the immediate requirements. The details as 
given in the estimate book may be self-explanatory to those in 
charge; but now the question comes up. Will everything be per- 
fectly plain to the other party to the proposed contract ? Will it 
be made plain what the contract does not include as well as what 
it does include ? Not only must each item of the specification be 
so described that the meaning is perfectly clear to us, but we must 
be satisfied that we have done our utmost to convey exactly the 
same meaning to the other party of the proposed contract. 

This again brings to our particular attention a point which I 
impress upon you so frequently — that a sound working knowl- 
edge of the mother tongue is a necessity to the engineer, as it is 
to all who occupy or expect to occupy positions of authority. 
Why it should be necessary to impress this truth with such insist- 
ence upon engineering students, I have never been able to under- 
stand. 

While it is desirable that the specification shall be concise, it 
is far more desirable that it shall be expressed in language admit- 
ting of only one meaning, no matter how inelegant that language 



370 LECTURE NOTES 

may be. We should not hesitate to repeat certain words if we 
are convinced that our meaning can be thus more certainly con- 
veyed. If an apparently plain and simple statement is made 
before an audience, hardly any two of the listeners will have 
conveyed to their minds by the spoken words exactly the same 
impression. This fact should influence us constantly to exercise 
watchfulness and care even in the preparation of our less formal 
business communications. It should also be borne in mind that 
the written communication depends upon the cold words alone; 
there are no helpful gestures, expressions of the face, inflections 
of the voice to supplement and correct the imperfect speech ; and 
also that the written communication possesses a property which 
may work to our disadvantage as well as our advantage — its 
permanence. 

As has been pointed out in the lectures on commercial law, 
much of our correspondence is to be classed as the groundwork 
for contracts of one kind and another, and carelessness in expres- 
sion may, to our surprise and dismay, lead us into annoying and 
expensive lawsuits. 

I have also shown you from my own experiences how the 
haste which leads us to write communications that are not com- 
pletely self-explanatory in the first instance entails upon the 
sender and the receiver the expenditure of time and nerve energy 
many times greater than that which would have sufficed in the 
beginning to have made the initial communication complete and 
self-explanatory. You will remember that I gave one instance 
where I arranged for the exhaustive analysis of all of one class 
of correspondence between the office of a parent company and its 
fifty or more branch offices, extending over a period of six 
months. While I knew that this investigation would disclose 
unsatisfactory conditions, the result was a surprise to me as well 
as to all others concerned. It was found that the number of 
letters written to explain and correct six monthly reports, which 
would have been unnecessary had the initial communications been 
correct and complete in every detail, ranged in each case from 
ten to one hundred and two. 

Bear in mind that many of these men, whose correspondence 



SPECIFICATIONS AND CONTRACTS 371 

records were so analysed, were graduates of colleges of engineer- 
ing. 

Perhaps the greatest obstacle in the way of learning this lesson 
is that which obstructs all educational effort — the difficulty of 
making the student see the importance of the thing to be learned. 

For the warning of those of you who are inclined to slight 
what some ignorantly and foolishly classify as little things, and 
for the encouragement of those of you who are thorough and 
conscientious in details, let me point out that in the business 
world where such inability and indifference or lack of conscien- 
tiousness are continually made apparent in unsatisfactory results, 
that the overworked, harassed manager of to-day turns with 
open arms to the — I am sorry to say — exceptional employee who 
lightens his pressing burdens by completely performing the tasks 
assigned to him. The young man who slights a task because he 
considers it too insignificant to engage the attention of one so 
talented and highly trained, deserves all the hard knocks which 
the world is so prompt to inflict upon the undeserving. Young 
men often complain to me because, as they say, there are not the 
same opportunities to make their way as there used to be. In my 
opinion there never have been greater opportunities than at 
present, and there always will be opportunities for the capable, 
thorough and conscientious man, any time this side of the millen- 
nium, and that is about as far as we need to look. 

Having said all this by way of warning, it remains to be said 
that notwithstanding all the care, intelligence and specialized 
training which may be exercised in the preparation of specifica- 
tions it is still impossible to avoid all misunderstandings and 
disputes. 

Apart from differences of interpretation of words meant by 
the engineer to express a definite thought or intention on his part, 
cases must arise where it becomes necessary, or is considered 
advisable, to modify the original plans by reason of facts which 
first come to light after the work has been begun. 

The items for extras are a fruitful cause for dispute in connec- 
tion with the settlement of contracts. Unfortunately, some con- 
tractors endeavor to provide a place in their contracts for the 



372 LECTURE NOTES 

later introduction of extras, hoping thereby to get pay at higher 
rates for part of the work and at the same time lead the other 
party on to the making of a contract by holding out in the first 
instance the bait of a low lump-sum contract price. Conscientious 
engineers and contractors should exercise every possible precau- 
tion to reduce to a minimum the opportunities for "extras." 

When it becomes apparent that such extra charges will have 
to be made, or when it becomes apparent that modifications of 
the specifications are required, steps should be taken at once to 
arrange a supplementary agreement between the two parties to 
the contract, rather than to leave the involved questions open as 
the probable cause for dispute or possible litigation at the time of 
final settlement. 

The several clauses of a carefully prepared specification and 
tender may be divided into two classes : 

General Clauses^ which define the general conditions involved 
in the contract, the relative responsibilities of the several parties 
to the agreement, the lines to be followed in regard to acceptance 
on the part of the buyer, terms of payment, and the like ; and 

Specific Clauses, which cover the details of design and con- 
struction. 

It is well to classify carefully in this way the several items of 
the specifications, bearing in mind that, if an agreement is 
reached, the specification is to become the very essence of the 
contract. 

As a rule, the general clauses can be made standard, to apply 
with little or no alteration to all contracts of a certain class. 
This portion of the specification form should therefore be 
amended carefully as experience suggests. The original form 
and all changes should be submitted to the judgment of a com- 
petent legal adviser. 

It is well here to remind you that whenever a doubt is sug- 
gested as to the best form in which to prepare a business paper 
so as to secure the maximum of protection under the law, go to 
a competent lawyer. And remember that a lawyer is not neces- 
sarily competent because he has been admitted to the bar. There 



SPECIFICATIONS AND CONTRACTS Z73 

are misfits in this profession as in every other. You are ready 
to believe that it is wise for those not specifically trained in 
engineering science to consult a specialist as questions in that 
line arise ; you, then, should be prompt to recognize the wisdom 
of engineers consulting specialists in the law when the particular 
question to be solved is one of the law. 

I shall not here attempt to set before you specimens of specifi- 
cations as actually employed in the field of engineering. Such 
examples would necessarily vary greatly with every branch of 
engineering considered. It would be only in general that such 
examples could be employed to advantage in such a crowded 
course as ours at "Stevens," especially as we find by our alumni 
directory that our graduates by no means confine themselves to 
the one branch of enginering which, for want of a better name, 
is styled Mechanical Engineering, but are to be found occupying 
positions of importance in every branch of engineering practice. 

I would strongly advise you, however, as you settle down to 
practice in any one branch of our profession, to make a persistent 
effort to collect representative specifications from engineers of 
good repute. These men will frequently be found willing to 
furnish such specification forms in individual cases where they 
might be unwilling to furnish them for inclusion in these notes, 
which are intended for somewhat extended distribution. 

Even the forms employed by the most eminent men in the 
profession should not be accepted blindly as applicable to a par- 
ticular case in hand. 

Before closing, a few words may be said on the subject of 
appraisals of properties. 

The subject is of such commanding importance to-day in con- 
nection with the control of Public Utilities by government authori- 
ties that to its specific consideration might well be devoted much 
time and study; but the total time allotted to these lectures is 
about exhausted. 

Incidentally in these lectures the subject has been considered 
and some of the most important elements involved have been 
considered in considerable detail. Much that has been given 
under the heads of Accountancy and Depreciation are directly 



374 LECTURE NOTES 

applicable. Practically all that has been said on Estimates has 
a direct bearing upon Appraisals. 

It has been shown that the cost of a plant is by no means 
covered by the cost of the scheduled items of material and labor. 
Certain appraisers assume that because they can schedule the 
plant presented to their inspection, no allowance should be made 
for items outside and beyond that schedule. They argue that 
there are no omissions to be allowed for because all the plant is 
scheduled. This is not true, for it is rarely if ever that an 
inventory made as the basis of an appraisal does not omit items. 
But beyond this there are items which have cost money and 
which properly should be included and which do not appear and 
cannot appear in an inventory of the plant as it exists. Years 
after completion, the finished plant utterly fails to reveal to the 
sight of the appraiser many items of cost which had to be met, 
and which were beyond the control of those in charge. Also 
there were items of loss due to mistakes and accidents which are 
necessarily a part of all human undertakings, no matter by whom 
directed. 

If twenty years from now the Hudson tunnel shall be 
appraised, who shall be able by an inspection of the physical 
assets to determine what was the cost of restoring the pipes, 
sewers, etc., underground, and of maintaining in condition for 
operation the elevated railroad, and the restoring of the surface 
of the streets? Or who shall be able twenty years from now by 
inspection of the New York Central Terminal, now in course of 
construction, to determine what was the extra cost of keeping 
the road in operation during construction ; what was the cost of 
the buildings and plant erected for temporary use ; what was the 
cost of the temporary interference with other properties ; and the 
like? 

Nothing can be farther from the truth than the statement that 
a true appraisal of reproduction cost can be based upon the cost 
of the property as found and scheduled, even if the schedule is 
complete, which it never is. Particularly must adequate allow- 
ance he made for the ^'Overhead Charges" enumerated in connec- 
tion with the discussion of estimates. 



SPECIFICATIONS AND CONTRACTS 375 

Let me warn you that the making of an appraisal is a service 
not to be Hghtly undertaken. Especialjy is there a tremendous 
responsibihty assumed by those who undertake to appraise the 
properties of PubHc Utihties for rate making purposes, though 
this responsibihty apparently is not recognized by many who 
assume to be experts in this line. Every class of Public Utility 
has its own peculiar problems and a just appraisal cannot be made 
by a man who is unacquainted with and incapable of solving these 
problems. 

I have not so far prepared anything specific with reference to 
that important business feature of engineering practice; namely, 
the necessity for practicing within the limits set by commercial 
conditions. The time allotted to these lectures is already 
exhausted, and there are four reasons why I am satisfied that the 
subject has been sufficiently covered: 

1. Mr. W. M. McFarland's article, reprinted from Cassier's 
Magazine, and included in Part I, should be sufficient, unsup- 
ported by further words on my part, to convince intelligent engi- 
neer-students that the condition named is one with which they 
must be prompt to comply. 

2. This truth is almost invariably brought out prominently in 
the special lectures delivered by outside practitioners, and so 
naturally that frequently the lecturers themselves are unconscious 
of having emphasized this point. 

3. I am continually including illustrations of this truth in 
connection with my talks on the other business features of 
engineering practice. 

4. It should not be difficult for a student possessed of suffi- 
cient intelligence to meet successfully the test of three years of 
our "weeding out" process to appreciate that an engineering 
design or an industrial undertaking must necessarily be along 
lines which will afford an adequate return to the investor; that, 
therefore, the description of the engineering project must be such 
as to appeal to the banker who acts as the intermediary between 
those responsible for industrial undertakings and the general 
investing public ; and that the honest and capable engineer must 
be prepared to discriminate between immediate and final profit. 



2>1(i LECTURE NOTES 

My experience with nine senior classes is in accord with this 
theory. I have found the students more ready to acknowledge 
that commercial conditions control and limit engineering practice 
than they are to undertake the drudgery of preparing themselves 
to meet this condition intelligently and efficiently by familiarizing 
themselves with commercial limitations and business methods. 

Now let me summarize my talks on some of the business 
features of engineering practice, as follows : Use your common 
sense as cultivated and developed by your "Stevens" training in 
theory; be keen to learn from those who have been trained in 
the school of experience; while relying upon your reasoning 
powers rather than your memory, make use of all relevant data 
which you know to be completely trustworthy; recognizing that 
the engineer is a commercial scientist, never forget that the 
money you spend for others is a trust. 

And finally, be true to yourselves and so be true to your pro- 
fession and vour Alma Mater. 



Part III 

SPECIAL LECTURES 



1 



NOTES ON CONTRACTS 

By 
Howard E. White 

Law is concerned with the exposition and appHcation of 
those principles which regulate the relations of man to man. 
Criminal law prescribes and enforces the duties which man owes 
to the State and to the public as a whole. 

Civil law deals with the private relations of individuals be- 
tween themselves, and finds its chief end in preventing the occur- 
rence of differences in the manifold activities of civilized life, or 
of adjusting such differences as shall have arisen. Law, in its 
broadest sense, is based upon a very few elementary principles of 
justice, fairness, and equity, which may be as well and easily 
understood by the layman as the lawyer. The technical niceties 
and refinements of the law have to do with the application of 
these principles to concrete cases, and require a lifetime of unre- 
mitting research and study. They are the special province of the 
lawyer. 

No layman, however talented, is qualified to master these 
legal intricacies, but no one, however small his business, can fail 
of benefit from a consideration of general legal principles. The 
more widely they are understood and heeded in carrying on the 
everyday affairs of life, the less chance there will be of entangle- 
ment in tedious and expensive litigation, which may, whatever its 
outcome, ultimately ruin the most prosperous business or cloud 
the success of the most talented individual. 

It is a matter of common experience to see men, eminent in 
their own specialties, so ignorant of business and its methods as 
to fail of success when they attempt to practically apply their 
knowledge and talents. 

The object of these notes is not to attempt to impart knowl- 
edge which will enable a layman to become his own lawyer, but 
rather to instill a knowledge of the legal necessities of business 



380 LECTURE NOTES 

life, and to make possible the formation of a correct judgment as 
to when legal aid should be retained. 

Money wisely spent for competent legal assistance, when large 
projects are in their inception, is likely to save the expenditure 
of a much larger sum in an attempt to correct the disastrous 
result of a careless or improvident act. 

The Law of Contracts Important to Business Men. 

A generally accepted classification divides the body of legal 
principle into two parts : 

1. Those which concern torts. 

A tort is the violation of some legal duty owed by one indi- 
vidual to another and existing independently of any contract. 

2. Those which relate to contracts. 

While some lawyers make a specialty of the former class, in 
which are comprised suits to recover damages for personal inju- 
ries, by far the larger number of attorneys are concerned almost 
exclusively with the second branch of the law. 

Varied as the activities of modern civilization have become, 
it still remains true that, broadly speaking, the life of the average 
business or professional man is for the most part concerned with 
making and performing contracts. In the last analysis almost 
every action of the day brings us within the reach of some con- 
tract, express or implied. 

Some knowledge of contract law, therefore, is a fundamental 
necessity to everyone. 

What Is a Contract ? 

This seems a simple question and one to which almost every 
layman feels competent to respond. An attempt to do so, how- 
ever, shows how difficult it really is to frame a definition suffi- 
ciently broad to cover the multitudinous varieties of contracts 
which are legally possible. 

Almost as many definitions have been given as there are con- 
tracts. A sufficiently simple and non-technical one is as follows : 
An agreement, enforceable at law, creating an obligation not 



LAW OF CONTRACTS 381 

theretofore existing, upon the parties or some of them, to do or 
refrain from doing some lawful act, in return for value received. 
The most important feature of a contract is, of course, that it 
is the basis of some new agreement. It is creative, and by it the 
parties voluntarily assume obligations from which they were for- 
merly free. The importance of a contract, from the standpoint of 
law, arises from the fact that, whereas it is created by the volun- 
tary act of the parties, once made, it will be enforced by the courts, 
as strictly as though its terms were part of the statute law of 
the State. The very freedom given by the law in respect of con- 
tracts imposes upon the contracting parties the necessity for an 
added measure of caution. The courts extend no protection to 
the maker of an improvided contract. When it has once been 
signed the obligations imposed by it are as binding as though its 
terms were of the most advantageous character. The law sup- 
poses that in making contracts the parties themselves are best 
qualified to fix its terms, and, though these may at a subsequent 
date prove oppressive, the law will extend its utmost aid to their 
enforcement. The inviolability of contract rights is most jeal- 
ously guarded by the law. The courts are called upon to con- 
sider more cases arising out of contracts, than from any other 
source. Out of the infinite variety of private agreements entered 
into arise an infinite number of variations in the application of 
established principles. To cope successfully with the niceties of 
interpretation the lawyer must be possessed of acumen, persever- 
ance and genius. This is the technical side of law. 

Executed and Executory Contracts. 

Contracts are divided as respects the time of performance into 
two major classes. 

1. Executed. 

2. Executory. 

In the first class are included those contracts which are per- 
formed, substantially at the time when they are made, or so 
shortly after as to make the whole transaction simultaneous, as 
in the case of a purchase of merchandise followed by immedi- 
ate delivery. The agreement as to price constitutes a contract, 



382 . LECTURE NOTES 

which is immediately executed or performed as the buyer departs 
bearing his purchase. 

An executory contract is one in which a substantial lapse of 
time occurs between the making of a contract and the carrying 
out of its terms. 

It is to the executory contract that we usually refer when we 
popularly speak of a contract, and it is with that branch of con- 
tract law that the present notes are concerned. 

A large number of the contracts entered into are performed 
without differences between the parties. But it is certain that 
no contract should be made in any spirit of fancied security aris- 
ing from this fact. The best of friends and the closest business 
associates are prone to disagree, and the better the friendship and 
the closer the association, the severer the breach. Every con- 
tract, therefore, which involves future performance should be 
regarded with respect to its ability to stand the test of such a 
disagreement and its consequent construction by the courts. It 
is obvious that the more distant the time of full performance the 
more chance there is for misunderstanding and difference. 

Express and Implied Contracts. 

It is important to remember that not all contracts are reduced 
to writing, or even orally phrased. It sometimes happens that a 
man by his acts, perhaps unintentionally, involves himself in cer- 
tain obligations which he little suspects. This fact gives rise to 
another subdivision of executory contracts into — 

1. Implied Contracts. 

2. Express Contracts. 

1. An implied contract is a relationship, which springs unbid- 
den from the surrounding circumstances. Certain civil acts a 
man cannot commit unless he would accept the consequences. 
Thus, if a merchant delivers goods to a prospective customer, 
without order, and the recipient retains and makes use of such 
goods, the law implies a promise or contract to pay for them. 
Possibly the customer was ignorant of the law, and never in- 
tended to pay for what he used, but he may be forced to do so. 



LAW OF CONTRACTS 383 

This is the simplest example of an implied contract, but it often 
happens that very complex problems are presented when the 
question arises as to whether an individual has not made him- 
self liable to certain obligations by a course of dealings which 
he never intended should have such a result. 

An implied contract is a pitfall to the unwary, and is referred 
to here by way of warning. Luckily there is a plain danger sign 
posted at its margin, obedience to which will prevent danger. It 
lies in the business maxim : ''Do not expect to get something for 
nothing." 

It may sometimes happen that this law may be violated and 
the offender escape scot-free, but its disregard always raises the 
danger that having received benefits under the impression that 
they need never be paid for, the law will step in and insist upon 
a just compensation. 

It is always safest to ask, when in receipt of obvious bene- 
fits : What do I give in return ? Not only is this true in respect 
to financial matters, but as well in matters of favor. One who 
grants a favor will some day expect one, and generally two, in 
return. 

2. Opposed to the implied agreement is the express con- 
tract, with which we shall chiefly deal. 

An Express Contract is one, as its name implies, which is 
framed either orally or in writing, with the intent by the parties 
to enter into a valid, binding agreement. 

Examples are so common as to need no especial mention. 

Written and Oral Contracts. 

Except in instances especially covered by statutory enactment, 
a verbal or oral contract is exactly as binding as one in writing, 
if its terms be sufficiently proved. The attempt to do so is often 
involved in insurmountable difficulty. For this reason, if for no 
other, the question of oral contracts may be briefly dismissed 
with the statement that they should never he entered into if they 
can possibly he avoided. They are always dangerous and give 
rise to more litigation and discussion than can well be measured. 

Insist that every agreement made should be reduced to writ- 



384 LECTURE NOTES 

ing, if only in the form of a memorandum. In this way only can 
trouble be avoided. 

Statute of Frauds. 

Some contracts must by statute be in writing in order to be 
valid. Thus, in every jurisdiction will be found statutes known 
as the Statutes of Fraud, which are practically uniform every- 
where, and are to the effect that all contracts for the sale of prop- 
erty in excess of a specified amount in value ; contracts which are 
not to be performed within a limited time, and contracts to be- 
come responsible for the actions of another person, must be in 
writing and signed by the person to be charged. The reason for 
such a statute is obvious. 

Before passing to a consideration of the essentials of a con- 
tract, a word is proper as to the expression of its terms. 

Many words do not mean a good contract. Still less does an 
excess of legal terms or phraseology. The best contract is the 
simplest both in form and language. As in every other written 
instrument, brevity should be sought, though not at the expense 
of clearness of expression. If, therefore, a contract is presented 
for signature, the meaning of which is not absolutely clear, signa- 
ture to it should be refused. The word of an associate, or even 
of an attorney, that a certain unintelligible phrase has a definite 
meaning, is insufficient. If it be found that there is room for a 
discussion as to the meaning of a word, it should be remodeled at 
all hazards until there can be no two opinions as to the intent. 
The habit of careless expression leads to more ambiguity in con- 
tracts than any other one cause, and it is absolutely without ex- 
cuse. The layman falls into the error through carelessness or 
inadvertence. At times the lawyer is equally negligent, but it also 
frequently happens that a lawyer attempts to draw a document so 
artistic in its brevity and conciseness that he sacrifices, more or 
less completely, clearness and common sense. But on the other 
hand, one should not be misled into thinking that the best lawyer 
is one who draws the most elaborate or impressive contract. The 
reverse is apt to be the case. When one receives from an attor- 
ney a contract which appears to be so simple that it seems that it 



LAW OF CONTRACTS 385 

might well have been drawn without legal assistance, it is certain 
competent counsel has been retained. 

The foregoing statements have been, for the most part, explan- 
atory and analytical. We now pass to the essentials of a con- 
tract, written or oral. 

Essentials of a Contract. 

1. Parties capable of contracting. 

2. A lawful subject-matter. 

3. A definite, clear offer. 

4. An unequivocal acceptance. 

5. Complete agreement of parties. 

6. Valid consideration. 

1. Parties capable of contracting. 

Every person who has attained legal age; who is under no 
civil or mental disability, temporary or permanent, and is free 
from compulsion, is capable of entering into a valid, binding 
contract. 

In explanation of the foregoing the following should be noted : 

Person. — The word person includes corporations and women. 
Corporations, however, must act within the scope of their char- 
ter powers. At common law married women were deemed inca- 
pable of contracting, but by statute in practically every jurisdic- 
tion this disability has been removed, and they may contract with 
entire freedom. 

Legal Age. — By practically universal enactment the period of 
infancy terminates, for both man and woman, at twenty-one 
years. In some few jurisdictions women are deemed of age at 
eighteen. Local statutes should be consulted upon the point. 

A contract made by an infant is not absolutely void, but may 
be avoided by the infant, who cannot, against his will, be forced 
to perform it. There are only two exceptions to this rule: One 
is that an infant may be compelled to pay for necessities fur- 
nished for maintenance or support. The other is that infancy is 
not a ground for breaking the marriage contract. It must be re- 
membered, however, that if the infant be willing to abide by the 
terms of the contract he can enforce performance from the other 



386 LECTURE NOTES 

party thereto. In other words the defense of infancy is only 
available to the infant himself. A contract made with an infant 
during his minority may, however, ripen into a valid and binding 
contract when the infant becomes of age, provided, either ex- 
pressly or by implication from his actions, he ratifies it after that 
time. Thus, if an infant makes a contract, and after becoming 
of age accepts benefits under it, it will make the contract a good 
one. The infant is under obligations if he wish to disaffirm his 
contract to do so within a reasonable time after he becomes of 
age. If he fail to take such action it is an implied ratification of 
his prior contract. 

If the infant elects to rescind his contract he must, so far as 
possible, return all benefits which he has received thereunder. 
Should he fail to do so, he cannot escape liability upon his agree- 
ment. The general view, however, is that the infant is not pre- 
cluded from rescinding his contract when he becomes of age by 
reason of the fact that it is physically impossible for him to re- 
turn benefits thereunder. It sometimes happens that a contract 
has been partially performed during infancy, and that the minor 
has received some advantage therefrom. He may have received 
a sum of money for a piece of property sold by him, and have 
spent it before becoming of age. He may, nevertheless, recover 
the property from his vendee. 

At first glance this appears to be a hardship, and it is a doc- 
trine which is frequently criticised by laymen. It is founded, 
however, upon the very reasonable idea that one who deals with 
an infant, does so at his peril, a minor being, in the eye of the law, 
not competent to protect his own interests. The law takes care 
of this anomalous situation by allowing the appointment of a 
guardian for an infant, and through such guardian the infant 
may make all contracts which are necessary for his best interests. 

Civil Disability. — In England and many of the United States, 
criminals convicted of felony are debarred from exercising civil 
privileges. Imprisonment for life is accounted civil death. 

Mental Disability. — Mental disability may be either partial or 
total, permanent or temporary, and arise from permanent or acute 
causes. 



LAW OF CONTRACTS 387 

One whose mind is clouded to such an extent as not to under- 
stand the nature of the act, is deemed incompetent to contract, 
whether such condition proceeds from insanity, intoxication or 
the use of drugs, and such contract is avoidable at the option of 
the person so incapacitated. While the rule, like some others 
stated herein, is occasionally modified in some jurisdictions, the 
prevailing rule in the United States has been given. 

Compulsion. — A contract cannot be enforced against a person 
who is induced to enter into it by threats of personal injury to 
self or family, or of illegal detention or injury to property. 

The foregoing considerations are somewhat technical ; but they 
have been stated as simply as possible. For practical purposes, 
the most important points to remember, are the disability of 
infants and the limitation of the power of corporations. No 
important contract should ever be made with a corporation with- 
out legal assistance to discover first, whether the corporation has 
power to make the agreement, and second, whether such con- 
tract has been duly authorized by the directors, and authority 
delegated to the officer who attempts to bind the company. 

2. Lawful subject-matter. 

It is the policy of the law to allow the utmost freedom of con- 
tract, and no limitation is placed upon the right to contract save 
only that a contract may not be made to do an act which is for- 
bidden by law, or one which is opposed to public policy. Thus, 
one cannot contract to erect a building in violation of the build- 
ing law, nor to commit a felony or a misdemeanor. It is usu- 
ally simple to determine whether the object which it is desired to 
effect is forbidden by law. It is not always easy to determine 
whether the object is contrary to public policy. Cases frequently 
arise which appear to be innocent upon their face, and which 
to the lay mind seem to have no bearing upon any individuals 
other than the parties to the contract themselves. Upon a closer 
inspection, however, it is seen that they affect the underlying 
principles upon which is based our system of government. Thus, 
it is the policy of the law that every man should be free to earn 
a living as he will; that trade should not be unduly hampered 
or constricted; that gambling should not be encouraged, that 



388 LECTURE NOTES 

necessities should not be monopolized or the price thereof unduly- 
inflated. An agreement to do any of these acts is regarded in 
the light of a conspiracy and will not be enforced by the court. In 
many cases one who is not a party to the contract may prevent 
the carrying out of its provisions, if harmed thereby. It will often 
be found that this question of public policy will confront those 
who are considering contracts to restrict the use of patented ar- 
ticles, or to limit the area within which parties to the contract may 
practice their profession. These questions are always trouble- 
some. 

3. Definite offer. 

All contracts are based upon an offer by one of the parties 
and an acceptance by the other. These are the preliminary 
steps, and present a variety of interesting questions. Thus, one 
offers to work for another and the contract is concluded by the 
acceptance of the proffered services. 

The offer must be definite and, generally speaking, to a defi- 
nite person. A vague offer makes either no contract at all, or at 
most, a very unsatisfactory one. In the interest of definiteness 
and clearness as a preliminary to a contract, the following warn- 
ing may seem to be timely: a neglect to consider it is at the 
bottom of a large percentage of the difficulties arising out of con- 
tracts. One who proposes to make a contract must come to a 
clear understanding with himself in respect of what he really de- 
sires to accomplish. If he has a hazy, indistinct idea of the obli- 
gations which he is about to assume, or of those which he desires 
to impose upon others, he is almost certain to make an unsatisfac- 
tory contract, and end in litigation. 

He must be careful not to confine himself to a consideration 
of present conditions. A contract of prolonged duration, which 
is acceptable to-day, may be objectional next year, but will not 
be in any degree less binding; dissatisfaction is not a ground for 
cancelling a contract. He should not be content to take the 
opinion of those with whom he is contracting as to what he 
desires, but will independently and carefully consider it from his 
own point of view, and, having once come to a conclusion, will 
not be moved therefrom in essential points. Foresight is that 



LAW OF CONTRACTS 389 

quality which differentiates the successful from the unsuccessful 
man, and in making contracts no other quality is so much needed. 
A most frequent difficulty which is the subject of repeated com- 
ment by the courts in rendering their decisions, springs from 
the fact that one of the parties failed to give sufficient thought 
to the consequences of his agreements, or to anticipate conditions 
which a few moments' careful consideration would have made 
plain to him. 

In stating that once having arrived at an opinion one should 
not be moved therefrom, it is not intended to counsel a spirit 
of uncompromising stubbornness, which would probably result 
in a failure to make a contract. Every agreement, when finally 
executed, usually contains concessions from the original propo- 
sitions made by the parties, and one should be ready, after having 
determined what self-interest dictates, to make concessions at 
such points as are possible. But this should not be done lightly 
or unadvisedly. A concession made in a thoughtless moment 
and without due consideration, may mean years of litigation and 
financial loss. In making propositions or demands, however, 
it is essential to regard the interest of the other party to the 
contract. Fairness to others is one of the secrets of personal 
success. If, therefore, one approaches the making of a contract 
with an apparent unwillingness to regard any but self-interest, 
and an obvious desire to reap all the advantage possible without 
regard to the equities existing in favor of the other parties to the 
contract, though the negotiations may terminate in an agreement 
of some form, it will lack the surest guarantee of successful 
performance, mutual confidence and trust, without which the 
strongest contract may be turned into a bone of contention and 
the most promising prospects ruined. 

Having definitely determined upon the offer, it must be com- 
municated in any appropriate way, orally or in writing, by letter 
or telegram. In the interest of accuracy, however, the offer 
should, whenever possible, be reduced to writing. 

The offer is a nullity until it is actually brought to the notice 
of the person to whom it is made, and may be withdrawn at any 
time before it is accepted, notwithstanding a voluntary statement 



390 LECTURE NOTES 

that it may remain open a definite time. Thus, an offer sent 
by letter may be withdrawn by telegram reaching its destination 
before the letter, or before acceptance. 

4. Unqualified acceptance. 

From the foregoing it is plain that acceptance should be 
prompt, if a contract is desired. Such acceptance must be of the 
exact terms of the offer. A counter proposition is not an ac- 
ceptance and simply leads to further negotiations and a new offer. 
To constitute a contract, it must be possible for the one to whom 
the offer is made to say simply, 'T accept your offer." 

Like the offer, the acceptance may be communicated in any 
convenient form, but unlike the offer, the acceptance becomes 
binding the instant it passes beyond the control of the accepting 
party. 

Thus, the instant an acceptance is placed in the mail, or dis- 
patched by telegraph, it becomes binding and the contract is 
complete possibly some time before the acceptance becomes 
known to the maker of the offer. Thereafter it is impossible 
for either party to withdraw from the contract unless by consent. 
This fact, it will be observed, often embarrasses one who makes 
an offer and wishes to withdraw it. Cautious business men heed 
the advice of Sir Frederick Pollock, who once said : 

"The practical conclusion seems to be that every prudent man who makes 
an offer of any importance by letter, should expressly make it conditional 
on his actual receipt of an acceptance within some definite time." 

5. Complete agreement. 

Closely akin to the necessity of an explicit acceptance, is the 
rule that the minds of the parties to a contract must be in com- 
plete accord. This is known as the "Meeting of the minds of the 
parties," and no contract is complete without it. A contract, 
valid in all other respects, may subsequently be avoided or re- 
scinded if it appear that the parties had not arrived at this meet- 
ing of the minds. 

Such a situation arises when to all appearances the parties 
have agreed, but in reality have never come to an understanding. 
The cases when this occurs are generally divided into the fol- 
lowing classes: 



LAW OF CONTRACTS 391 

a. Mistake of fact. 

b. Misrepresentation. 

c. Fraud. 

d. Undue influence. 

a. Mistake of Fact. — It sometimes occurs that all the parties 
to a contract are misled as to the subject-matter of their agree- 
ment. Thus, a cargo of grain was sold while in transit by sea 
to London. It subsequently appeared that prior to the sale the 
cargo had been destroyed. It was held that the sale was invalid. 
Similiarly, where a contract was made to dig a thousand tons 
of potter's clay yearly from certain territory, and it subsequently 
transpired that at the time of making the contract there was not 
so much as one thousand tons of clay under the land, the agree- 
ment was declared void. Again, A may agree to sell to B a horse 
(meaning a certain bay). B agrees to purchase the horse, sup- 
posing it to be another animal. No contract ensues. It is, of 
course, obvious that to avoid the contract, the mistake must be in 
respect to some vital, material point. 

These mutual mistakes are comparatively rare and do not, 
ordinarily, cause great difficulty. Much more intricate are the 
questions involved in the following cases : 

b. Misrepresentation. — It sometimes happens that one party, 
without evil intent, unintentionally misstates facts, or misleads 
the other party. This is known as misrepresentation, and must 
be carefully distinguished from fraud where the deception is in- 
tentional. 

Where the misrepresentations occur in preliminary negotia- 
tions, they have no effect upon the validity of the contract, unless 
the relations between the contracting parties were such that they 
owed to one another some special duty of exact and explicit 
statements. Such is the case when the parties occupy a confi- 
dential relationship to one another, as that of principal and agent, 
attorney and client, and the like. Such a situation also arises 
where from force of circumstances one party must rely upon 
the other for his knowledge of the facts. In this case the other is 
bound to the utmost good faith. 

But it sometimes happens that instead of the innocent mis- 



392 LECTURE NOTES 

representations being preliminary to the contract, they actually 
become an integral part of it, and the inducing cause for making 
it. The representation then amounts practically to a covenant 
or warranty, and, if false, may be made the basis for a cancella- 
tion of the contract. A single instance will suffice : 

A, being about to sell a horse to B, without any guarantee, says 
"the horse is sound." B buys and finds a defect; he cannot re- 
scind. But if A says, "I warrant the horse sound," and a blemish 
appears, the transaction is a nullity. 

The practical application of this doctrine to business men is 
that they should show extreme care in making hasty or thought- 
less statements in entering into a contract. Let all information 
which is given be such as ma'y be substantiated by proof, and let 
no guarantees be made which cannot be performed. 

This leads, naturally, to a consideration of a kindred nature. 
The surest way to promote litigation over a contract, and to land 
in an endless maze of trouble and difficulty, is to have a party to a 
contract fail to appreciate the true significance of what he is 
doing. We have adverted to the necessity of a complete knowl- 
edge of one's own position. It is equally essential that all parties 
should appreciate their responsibilities. It is a matter of frequent 
occurrence to have a client request his attorney to so phrase cer- 
tain portions of his contract that he may create an obligation 
upon the other side which will not be suspected at the time the 
contract is made. Nothing is more foolish or shortsighted, and 
no wise attorney will accede to such a request. The reasons are 
obvious. If the obligation is one which should in fairness be 
assumed, it should be stated openly and frankly. If, on the con- 
trary, it is of such a nature that the contract would fail of con- 
summation if it were expressed in the instrument, an unfair ad- 
vantage is about to be taken, and when subsequent to the making 
of the contract its true meaning is disclosed, it will result in one 
of two things. It may be that the agreement will have been in- 
serted in such a skillful manner that it can be enforced, in which 
case the advantages gained therefrom will be at the expense of 
confidence and good will; or, as more frequently happens, the 



I 



LAW OF CONTRACTS 393 

contracting parties will be involved in a lawsuit, which may ex- 
tend to the third and fourth generation of their descendants. 

c. Fraud. — Fraud is willful misrepresentation or suppression 
of a material fact made by one party with intent to induce an- 
other party to enter into a binding agreement, and which has such 
a result. Fraud is always a complete ground for the rescission 
of a contract, and no agreement can survive its taint. 

Every word in the foregoing definition is essential, and the 
elements of fraud are carefully stated. It must be willful and in- 
tentional ; calculated to work injury, and result in it. 

Cases of willful affirmative deception are comparatively simple. 
Usually the only question is as to whether such deception relates 
to a material point. 

A much more difficult problem arises when we consider the 
question of a suppression of material knowledge. What facts is 
one bound to reveal in order to avoid the taint of fraud ? 

On the one side is the danger of fraudulent suppression of 
fact; on the other is the quixotic impulse to disclose all that is 
known, including legitimate special knowledge or business secrets. 
Thus one may buy a house, knowing of impending developments 
which may enhance its value. No obligation exists to disclose 
such knowledge. But if a man sells to another stock, which from 
special knowledge he knows to be worthless, it is as obviously a 
fraud. 

Unquestionably, the line is a fine one between the two cases. 
But consider that in the second instance the seller by accepting 
payment impliedly sold something of value, and the case is prac- 
tically similar to one of willful misrepresentation. Here then 
is the test. When the suppression of facts amounts to a false rep- 
resentation that they do not exist, then the element of fraud is 
present. 

But, after all, the best safeguard to business men against 
charges of misrepresentation or fraud is a high standard of busi- 
ness ethics, which makes one willing to forego profits which might 
be gained by sharp practice or doubtful methods. 

While such distinctions as have been suggested above are 
sometimes difficult to phrase in words, no man, whatever his 



394 LECTURE NOTES 

character, finds any trouble in practically determining whether his 
acts are such as conform to the generally accepted standard of 
moral duty. However far, personally, he may have departed 
from a high standard of personal rectitude, and however success- 
ful he may have become in stilling the voice of his conscience, that 
arbiter of duty never dies, and if questioned will, with the same 
certainty with which the magnetic needle points to the north, in- 
dicate conduct which would willingly be submitted for public ap- 
proval, and that which would preferably be concealed from gen- 
eral knowledge. 

Such words are not mere ethical theories, but point the way 
to the most practical test a business man can apply when in doubt 
about the legal aspect of a proposed course of action. Let the 
question be asked: "Would I be entirely willing to have such 
action generally known among my friends and business asso- 
ciates?" If the question can be honestly answered in the affirm- 
ative, no fear need be felt that the proposed course of dealing will 
ever be branded by the law as fraudulent or worthy of condem- 
nation. 

If the question be answered in the negative, it is certain that, 
while such method of business dealing may in any single instance 
add to pecuniary prosperity, it will in the long run mean loss of 
reputation and the confidence of the business community, as well 
as make extremely likely ultimate censure from the courts. 

If error must be committed, let it be upon the side of over- 
fairness to business associates rather than upon that of unscrupu- 
lous methods. 

d. Undue Influence. 

When an individual is so situated that the will has become 
subservient to another's to a point where independent action is 
practically impossible, such individual is said to be unduly in- 
fluenced. 

The most obvious example of such a condition is where one 
who is of feeble mental powers comes so under the power of a 
stronger personality as to yield unquestioning obedience. The 
dependent person need not be of unsound mind (which would 
make him incapable of contracting) in order to justify the court 



LAW OF CONTRACTS 395 

in saying that agreements made by him, under such influence, 
lack the essential element of a complete meeting of the minds. 

Such cases most frequently arise in instances of persons of 
advanced age, or in unusually dependent circumstances. 

A contract entered into between such a person and the one 
who is in a position to unduly influence the judgment, by which 
the latter benefits, is always scrutinized minutely, and is more 
than likely to be set aside. 

Sometimes this undue influence arises from the possession of 
a real or apparent authority, sometimes from the necessity or 
distress of the injured party. The result is the same. 

When one who is to be benefited thereby, enters into a con- 
tract with another who is dependent upon him either for advice or 
assistance, it should be insisted that the contract be submitted to 
some disinterested person before execution. In this way will be 
avoided serious complications and charges of bad faith which may 
be as painful as they are untrue. 

Duress, to which reference has been previously made, is some- 
times considered in the light of an obstacle to the complete meet- 
ing of the minds, but the writer prefers to treat it, as has been 
done, as a condition which incapacitates the party affected by it, 
from entering into a valid contract. 

6. Valid Consideration. 

While the law does not concern itself with the details of con- 
tracts made for legal purposes, and will enforce them according 
to their terms, there is one element which is essential to their va- 
lidity. Some return must be given for every promise made or 
right surrendered. This return is the consideration for the con- 
tract. It must be present in every contract in some form or 
another. If absent, the contract cannot be enforced, for it is 
clear that if one promise to do something for another, and re- 
ceive no benefit from so doing, he cannot be forced to fulfill his 
contract. A few examples of the plainer or simpler character 
will make this clear. 

1. A man agrees to build a machine for another who agrees 
to pay a stated price therefor. The contract is a valid one and 
may be enforced. The consideration for the promise to build 



396 LECTURE NOTES 

the machine is the promise to pay the agreed price, and vice 
versa. 

2. A promises to build a machine for B, but B makes A no 
promise that he will either accept or pay for it. The contract is 
absolutely void and unenforceable. There is no consideration for 
A's promise. 

These are simple forms and might, perhaps, have been given 
from general knowledge by any layman. All contracts, how- 
ever, are not simple and it is often difficult, if not impossible, to 
determine whether a valid consideration has been given or not. 
Thus, it is not a valid consideration for one to agree to do what 
he is already under obligation to do. If A, therefore, promises 
to pay B a debt which is already due, it would not serve as a con- 
sideration for B's promise to build a machine, but, on the other 
hand, A might agree with B that if B would build the machine, 
A would, for a definite period, not compete with B in his busi- 
ness in a specified locality. This consideration would be suffi- 
cient. 

To put it in its simplest form, therefore, if one desires to en- 
force a provision of a contract for his own benefit, he must make 
sure that he has given some value to the person with whom he is 
contracting, in return for the benefit he is to receive from him. 

The first question, therefore, which a business man will ask 
himself when about to make a contract is, What will he give in 
return for that which he expects to receive? He must give 
something. What is given is not altogether material. The law 
will not pass upon the question as to whether adequate value is 
given for what is received further than to say that the relation 
between what is given and what is received must not be so dis- 
proportioned as to be palpably unfair or unjust. Thus, if one 
offers to sell a horse, and the buyer agrees to pay $50 therefor, 
it is a complete consideration, although the horse may really be 
worth $250. If, however, the buyer agrees to pay but $1, and 
the horse is shown to be worth $1,000, it would probably be 
said that there was no consideration. It must be at once ap- 
parent that this is a fruitful subject for discussion in the courts, 
although the usual determination is that the court will not pass 



LAW OF CONTRACTS 397 

upon the adequacy of the consideration, so long as a consideration 
existed at all and is not unconscionably small. 

The particular character of the consideration or value which 
is given for what is received, is not important. It may take a 
variety of forms. As has been previously stated, it may be the 
payment of a specified sum of money; it may be the perform- 
ance of work or services ; it may be an agreement to refrain from 
doing certain acts ; it may be the suffering of some harm or detri- 
ment; it may be the foregoing of some legal right; but in the 
last analysis, something must have been given up, or the contract 
is unenforceable. 

If a complicated contract is being negotiated, it may be that 
the real consideration which will support it is something totally 
different from the conception of the parties. It is the business 
of the attorney to see that this consideration exists, or is made 
to exist, and that it should appear in the contract. Many a 
valuable contract has been lost by reason of a failure to properly 
express the consideration. Let no one be deluded by the fact 
that a contract bears a seal, or that it contains the usual clause 
"in consideration of One Dollar." Both of these safeguards will 
prove broken reeds, if no true consideration exists. 

Formalities Attending the Making of Contracts. 

Mention has previously been made of the necessity of having 
contracts in writing. It was stated that it was not always neces- 
sary to have the written instrument of a very elaborate character. 
A few words in connection with the form of contracts may not 
be amiss. 

Every contract should be signed by all the parties. A seal 
should be affixed for the purpose of raising the presumption that 
a consideration exists for the agreement. Originally, at common 
law, the seal was conclusive evidence of consideration, but the 
development of law has resulted in almost every jurisdiction in 
doing away wholly, or in part, with the distinction between sealed 
and unsealed instruments. A seal has the added effect of pro- 
longing the time within which actions to enforce the contract 
must be brought. Thus, in New York, an action on a contract 



398 LECTURE NOTES 

without seal, must be brought within six years, while twenty years 
is given within which to sue upon a sealed instrument. 

Contracts with corporations must always bear the seal of the 
company. It is the legal sign manual of the corporation. 

The form of the seal is immaterial, and in most states a scroll, 
or the word "Seal" written by hand, is sufficient. 

The question is frequently raised, whether it is necessary to 
have the signatures to a contract attested before a notary. If it 
is intended to have the instrument publicly recorded, it is in 
almost every jurisdiction necessary that it should be acknowl- 
edged. For instruments that are not to be so recorded, there is no 
absolute necessity either for an acknowledgment or for a witness. 
It is, however, desirable in every case to have a witness, if possi- 
ble, and to have the paper acknowledged when it can be con- 
veniently done. This springs from the fact that such a witness 
or acknowledgment facilitates the proof of the instrument. Every 
evidence of care in the signing of a contract adds to the force of 
its contents. In addition to this, the acknowledgment before a 
proper officer fixes absolutely the date upon which the instru- 
ment was in existence and in force. This is often a most im- 
portant point. It is hardly necessary to say that every contract 
should be dated, and should contain in the body of it a clear state- 
ment as to the date when the contract became effective, its dura- 
tion and its termination. All contracts should be executed at 
least in duplicate, and no one should ever allow any contract which 
has been signed to go out of his possession without retaining 
either such duplicate original, or a copy thereof which is abso- 
lutely correct. In these days of carbon copies, it is quite common 
to consider a copy complete which contains only the body of the 
contract. All original dates and signatures should also be copied 
upon the carbon reproduction. 

Having considered the questions preliminary to or connected 
with making a contract, we now pass to the consideration of sub- 
sequent rights and liabilities thereunder. 

Termination by Limitation or Consent. 

It is quite possible that some change of circumstances may 



LAW OF CONTRACTS 399 

occur which makes it desirable to terminate a contract, or some 
dispute may arise in respect thereof. Even this brief examination 
of contract law would therefore not be complete unless we gave 
some consideration to the methods of terminating a contract, and 
the cancellation of the rights and liabilities thereunder, either with 
or without the consent of all the parties thereto. 

In practically every contract, executory in form, a date is fixed 
for its expiration. At such time all rights and liabilities under the 
contract cease, unless the agreement be further extended by mu- 
tual consent, or displaced by a new one. It is hardly necessary 
to say that a contract is terminated when fully performed, and 
may also be terminated prior to the time fixed for its expiration, 
by the joint consent of the parties thereto. If, therefore, it be- 
comes apparent after making the contract, that it is mutually un- 
satisfactory, it may be so abrogated. No trouble will be expe- 
rienced if the parties are in accord. A contract which has been 
made in writing should be cancelled with as much formality as 
was evidenced in the original agreement, and the parties thereto 
should make certain that they receive proper releases of all liabil- 
ity thereunder. In the same manner that a contract may be can- 
celled, it may be modified or amended by mutual consent. 

Termination by Legal Means. 

Serious difficulty arises, however, in respect of the alteration 
of agreements or their cancellation when consent cannot be ob- 
tained. 

Notwithstanding all the precautions which we may take, it 
sometimes occurs that a party to the contract feels that he has 
been misled in entering into a contract; that he has not been 
fairly treated ; that the contract, as drawn, does not represent the 
real intention of the parties, or that there has been some mutual 
mistake of fact made by the parties, which renders the contract 
unprofitable. In a still greater number of cases there is a viola- 
tion of the terms of the contract for which redress must be sought. 
These questions are all interesting and will repay some considera- 
tion. 

As we have seen in certain cases, a party to a contract may 



400 LECTURE NOTES 

rescind the entire contract and be relieved from further HabiHty 
thereunder, even against the will of the other party to the agree- 
ment. The chief examples of this, some of which have been con- 
sidered in connection with the subject pf the essentials to a con- 
tract, are as follows : 

1. Where it appears that there is no consideration for 
the contract. 

2. Where the contract has been induced by fraud. 

3. Where the contract is impossible of performance. 

4. Where there has been a mutual mistake of fact in 
regard to the subject-matter of the agreement. 

1. We have previously spoken somewhat at length of the ne- 
cessity for a valid consideration in the contract. If it shall be 
found after the contract has been made, that no real considera- 
tion exists, the contract is unenforceable. Many examples of this 
will suggest themselves, for example: A might agree to perform 
some act for B in consideration of the latter's agreement not to 
compete with A in business in a certain locality. A might sub- 
sequently discover that B was already under agreement to avoid 
that territory, so that in fact B had given nothing which he 
was not already under obligation to perform. There being no 
consideration for A's agreement with B, he would be entirely jus- 
tified in refusing to perform his part of the contract. 

2. By far the most important ground for abandoning or re- 
scinding a contract is that fraud has been present in its incep- 
tion. If it be found, therefore, after making a contract, that a 
party has been willfully misled with intent to cause him to enter 
into a contract which he would not otherwise have made, he may 
cancel the entire agreement. It is difficult to prove the fraud 
which must necessarily be present in order to impair a con- 
tract. The essential facts which must be established are as fol- 
lows : It must be shown first that false representations were made 
by the individual with whom the contract was made; that these 
representations were accepted and led to the making of the con- 
tract ; they must have been made about a material fact and for 
the purpose of promoting the agreement. Most important of all, 
the individual making the fraudulent representations must be 



LAW OF CONTRACTS 401 

shown to have known that they were false. This latter require- 
ment is the most difficult to meet. 

One who would rescind a contract upon the ground of fraud 
must return any benefits received under it. He must place the 
other party to the contract in the same position which he occu- 
pied when the contract was made. If, therefore, he has placed 
himself in such a position that he cannot do this, his right to re- 
scind the contract is destroyed. The law will not permit a man 
to receive wholly or in part the benefits of the contract and es- 
cape the liability of performing his duty thereunder. 

3. One may be relieved from a contract which is impossible 
of performance either at the time the contract is made, or by 
the happening of some subsequent event, provided it was not 
known at the time the contract was made that such impossi- 
bility existed. Otherwise, he may be held liable in damages 
for his failure to perform. Where, however, a contract is en- 
tered into innocently, the law will not permit a man to suffer 
by reason of the fact that performance is impossible. Mere dif- 
ficulty of performance, although it may be great, and the loss 
which he suffered heavy, will not excuse performance, nor will 
a temporary impossibility. 

4. Rescission on the ground of mutual mistake of fact has 
been sufficiently considered under a previous subject. 

Upon any of the foregoing grounds, the contract may either 
be said to be void, or may be rescinded. 

Reformation. 

It sometimes happens, however, that the maker of a contract 
does not desire to go to the extent of rescission. Perhaps he 
feels that the contract, as drawn, does not accurately express the 
real intent had at the time it was made. In this event the aid of 
the court may be invoked to re-form the contract so that it shall 
accurately present the intent of the parties. This is always a 
more or less difficult task, however, unless the contract is clearly 
incomplete or insufficient. The general policy of law is that 
a contract in writing cannot be varied by parol evidence. That 
is, one cannot take a contract complete in itself and say that 



402 LECTURE NOTES 

something different from what is expressed therein was in- 
tended. There is only one case in which the court. will allow 
this to be done. If the contract is ambiguous or insufficient in 
its phraseology, so that it cannot be determined from the instru- 
ment itself what the real intention of the parties was, the court 
will receive evidence upon this point and will readjust the rights 
and liabilities under the contract accordingly. The rules of con- 
struction will be considered presently. 

Breach of Contract. 

We now pass to the general question of breaches of contract 
and the results which follow therefrom. A breach of contract oc- 
curs when one of the parties thereto fails to perform a material 
part of the agreement. A failure in an immaterial or insignifi- 
cant portion thereof is not a breach. The breach of a valid 
contract always gives rise to an action for damages sustained 
by such breach, and in many cases, if it be apparent that a breach 
of contract is contemplated, the court will interfere and before 
the breach be committed will prevent it by injunction. These 
two forms of relief must be clearly separated in mind. When 
the damages which follow a breach of contract may be meas- 
ured and determined and the party causing the breach is finan- 
cially able to respond in damages, the only remedy is to sue him 
at law for the amount of the loss which is sustained. If, how- 
ever, such damages cannot be measured nor can any money 
which may be recovered recompense for the loss sustained, or 
where the wrongdoer is financially irresponsible, an injunction 
will lie to prevent the threatened injury. A few examples will 
illustrate this statement. 

If A agrees to employ B at a fixed salary and refuses to do 
so, while B is ready and willing to perform his contract, it is clear 
that the damages which B sustains arise from the loss of his re- 
muneration. Ordinarily, no action can lie against A save to re- 
cover the amount of the agreed compensation. Let us suppose, 
'however, that A has agreed not to cut down a large tree stand- 
ing upon his property which gives shade to B's house. It is clear 



( 



LAW OF CONTRACTS 403 

that if A does so, the damage cannot be repaired. If B sees 
A about to commit the violation, he may stop it by injunction. 
Again, A may have agreed with B to permit him to use his 
laboratory for scientific experiments. B cannot obtain the same 
accommodations or facilities elsewhere. His damage will be ir- 
reparable if A does not fulfill his contract. B may therefore 
restrain A from removing his laboratory and force him to per- 
mit the use of it. Again, suppose that A has agreed not to 
practice his profession in the same town with B, and proceeds 
to do so. It is clear that the damage sustained cannot be meas- 
ured in money and the court will grant an injunction to pre- 
vent the threatened act. Lastly, suppose that A has agreed to 
give B an exclusive license to sell a patented article in a cer- 
tain city, and B finds that A is encroaching upon such terri- 
tory, while it appears that A is financially irresponsible. It is 
evident that although it may be possible to determine just how 
much has been lost through sales which A makes, which amount 
could ordinarily be recovered in an action at law, the fact that A 
is financially irresponsible will prevent such relief from being 
efficacious. A may be judgment proof. In this case the law 
will grant an injunction to prevent the unlawful act. 

This power to go beyond the mere question of damages and to 
restrain by injunction is called the equity power of the court. It 
is very jealously exercised and may be only invoked where the or- 
dinary remedies are unavailing. Nor can a man ever invoke the 
assistance of a court of equity, unless he is himself free from all 
blame in the premises. There are two maxims of equity which 
may be remembered with profit: "He who seeks equity must do 
equity" and "He who enters a court of equity must come with 
clean hands." Be the complaint ever so meritorious or the case 
sound at law, help will be refused unless the complainant can 
show that he is himself free from blame. 

It must be remembered also that whether suit be brought at 
law or in equity the complainant must always show a readiness 
upon his part to perform his obligations under the contract. 
There are some exceptions to this rule, but they so rarely occur 
and are of such a technical nature that we need not consider 



404 LECTURE NOTES 

them. Benefits under a contract can never be claimed unless 
obligations be performed. 

In some cases it may be that performance of a contract is 
prevented by the other party thereto, or that by his act perform- 
ance of the contract has been rendered impossible. In any case 
one must be ready to perform if he would enforce his rights. 

Thus, if one contracts to work for another, and employment 
is refused, the remedy is for the amount of the agreed wages or 
salary. But this amount cannot be recovered, should it appear 
that, upon the refusal to employ, the employee entered the service 
of some one else. In other words, he cannot receive double pay. 
If he recover his agreed wage he must deduct the amount re- 
ceived during the time for what the employer is held liable. 

Construction. 

We now pass to the last of the important considerations in 
regard to contracts, namely, the rules for the construction of such 
instruments. 

The methods by which contracts are construed by the courts 
is a matter so closely within the sole knowledge of practicing law- 
yers that the layman is not qualified to pass an opinion upon it. 
Two or three examples will suffice to explain this. When two 
persons enter into a contract they have in mind not only the terms 
of the particular instrument, but, as well, a large fund of knowl- 
edge personal to themselves, which they read into the paper and 
perhaps feel may be omitted safely from its phraseology. Some 
facts they may deem to be so well known, both to themselves and 
to the other parties to the contract, that to express them would be 
surplusage. When, however, the contract is taken before a court 
of justice for interpretation, it may be found that the other par- 
ties to the contract have conveniently forgotten these facts and 
deny their existence, and the point at issue may be deemed by the 
court controlling. This is the situation which occurs in practi- 
cally every contest over a contract. A sharp divergence of opinion 
is found as to what was really meant at the time of execution. 

It is well, therefore, to make certain, before signing a con- 
tract, that its phraseology is so clear, its terms so explicit and its 



LAW OF CONTRACTS 405 

contents so full that it may be submitted to any court, before 
which it may be brought, containing in the body of the instru- 
ment itself all the facts which are necessary to support the de- 
sired view of it. 

It must also be remembered that many expressions commonly 
used in contracts have a widely different significance in a court 
of law from their popular meaning. Furthermore, it is frequently 
the experience of litigants that they find obligations imposed upon 
them by the terms of their contracts, and which are implied from 
provisions stated therein, which were never in contemplation at 
the time the instrument was made. It is a lawyer's business to 
pass upon all these points. If an attorney be wise, he will neither 
draw nor pass upon a contract until he has first satisfied himself 
of the surrounding circumstances, and in many cases of the details 
of his client's business, in order that he may judge whether suffi- 
cient is expressed in the contract to guarantee its enforcement in 
a court of justice. Points which may seem insignificant to the 
client may seem important to him, and so prove if the contract 
be under fire. No one, therefore, should lose patience with an 
attorney if he seem to ask questions which the client may deem 
irrelevant and superfluous. It is a sign that he is in good hands. 
It is much better that the attorney should know too much than 
too little. No attorney should ever be employed who cannot be 
trusted with the minutest details of a profession or work. 

Many disputes arise from the fact that the parties to a contract 
are mistaken in their ideas of their obligations thereunder. With- 
out advice they assume to act in a manner which they deem justi- 
fied by their contract, but which in fact is in violation thereof. 
At times a failure to comprehend the true meaning of a contract 
may be excused upon the ground of the inherent difficulty of the 
case. More often, however, a few moments' careful consideration 
of the contract, prior to action, and even a slight knowledge of the 
rules by which such instruments are construed, would have pre- 
vented the violation. If, therefore, after making the contract the 
question arises whether a certain proposed course of action will 
be in accordance with the contract or in violation of its terms, the 
instrument must be considered, not in the light of personal wishes 



406 LECTURE NOTES 

or even of individual opinion. If a dispute arises between the 
parties to the contract it will not be settled by any such authority 
as this. The court will adjust the differences between the parties 
and construe the contract in accordance with well-established 
rules. An attempt must be made to regard the contract as the 
court will regard it. It is desired to give a few practical sugges- 
tions upon this subject. 

In the first place, when a contract comes before the court for 
interpretation, examination will be made first of the instrument 
itself, for so far as the agreement is clear and unambiguous the 
court will give to it full force and effect, nor will it allow any 
explanation to vary or alter the explicit statements made therein. 
This is obviously upon the theory that the parties were presumed 
to know what they did at the time they entered into the agree- 
ment, and when their intention is clearly indicated it must pre- 
vail, however burdensome or disagreeable. Thus far the inter- 
pretation is comparatively free from difficulty. It frequently 
happens, however, that while the question in dispute is partially 
covered by the terms of the contract, the phraseology of the in- 
strument is susceptible of two or more interpretations. It is then 
the province of the court to determine what was really meant by 
the language employed. There are a number of broad rules to 
guide the court. 

1. The words will be given their ordinary and commonly ac- 
cepted meaning, unless it appear from the circumstances of the 
case that they were used in a special sense. 

2. Where the subject-matter of the contract concerns a par- 
ticular trade or business, words having reference thereto will be 
given the meaning usually ascribed to them in such business or 
profession. 

3. The court will take cognizance of particular uses or cus- 
toms affecting the subject-matter of the contract. 

4. The court will endeavor to ascertain from any possible 
source what the real intent of the parties was, and give force and 
effect to that intention. 

This last rule is the most important of the four, and com- 
prises in a measure the other three. If the court can once deter- 



I 



LAW OF CONTRACTS AffI 

mine what the parties really meant it will conform the contract 
thereto, no matter what the actual phrasology may be. The first 
three are in reality aids to arriving at the last. 

It frequently happens that the subject in dispute is omitted 
entirely from the contract, and the court is then remitted to the 
necessity of determining what is fair and equitable, having in 
mind the whole contract and the circumstances surrounding it. 

In other words the court will say that if the question had come 
up at the time of making the contract, it would have been disposed 
of by the parties in general conformity with the rest of the agree- 
ment. 

It is hardly necessary to say that it must appear that the mat- 
ters omitted from the contract should have been included therein 
in order to justify the court in interfering. By that is meant that 
it must be so inseparably connected with the contract and so 
bound up in it that it may justly be claimed that it is implied in 
the instrument itself. Mention has been previously made of the 
fact that it frequently happens, in making a contract unadvisedly, 
that the parties find obligations imposed upon them by implication 
which they did not consider at the time the agreement was made. 
In passing upon such points as this the court applies much the 
same rules as in cases of ambiguity. In the last analysis they are 
determined by the intent of the parties and the principles of fair- 
ness and equity. If, therefore, a doubt arise as to obligations or 
rights under a contract, and the point in question is not found to 
be clearly stated in the instrument, the best test which can be 
applied, in order to determine action thereunder, will be to at- 
tempt to take the position and viewpoint of the other party to 
the contract. It should be considered whether from his stand- 
point the course of action which is proposed would be fair and 
equitable, and in accordance with the general intent, as disclosed 
from the whole contract. Let the question be asked whether, 
if the positions were reversed, such action would be permitted. 
If this be done honestly, both sides of the question will be argued 
with equal vigor, and an attempt will be made to arrive at a deci- 
sion which is in accordance with what is fair and just. If the 
contract be called before a court of law and an attempt made to 



408 LECTURE NOTES 

justify a given action, the course pursued will be determined by 
these principles, and their dictates might as well be observed 
before as after. Incidentally much trouble will be saved. 

It is a difficult thing to take an unprejudiced view of facts 
in the face of personal interests, but the attempt to do so should 
be made, if not from higher motives, because it is certain that in 
the long run it is more profitable to do so. Above all, one should 
not be carried away with the idea that because a contract may 
seem without flaw or defect it will prove sufficiently strong to 
justify an act which is not in accordance with these principles 
or which will make it possible to obtain an undue advantage over 
an associate. 

Conclusion. 

Such are the salient principles of the law of contracts. There 
remain only one or two observations, which are in the nature of 
general advice. 

Above all avoid, if it be a possible thing, litigation over con- 
tracts. It is better to surrender at times very substantial advan- 
tages rather than to undergo the dangers and difficulties of a law- 
suit. Though one may win eventually, it too often occurs that, 
despite the best efforts of the most competent attorneys, the ulti- 
mate victory will be fruitless. Litigants are involved in heavy 
expense and tedious delay. Their business may, meantime, be at 
a standstill, and they may, while in pursuit of fancied gain, lose 
very substantial present advantages. Like every other business 
question, when one is faced with litigation he must weigh whether 
the advantages which he will gain outweigh the certain disadvan- 
tages which he incurs. 

Unfortunately, there are too many cases where litigation can- 
not be avoided in justice to one's own rights, and with proper 
regard for one's own interests. The number should not be in- 
creased unnecessarily. He who is forced, however, into litiga- 
tion, should make up his mind to pursue it until he has either ob- 
tained his rights or a final decision of the highest court is ren- 
dered against him. 



I 



LAWS OF CONTRACTS 409 

The writer has endeavored in presenting this subject to give 
only general principles, and to avoid embarrassment by technical 
details or a discussion of the more complicated points. In some 
instances, principles which have been explained are subject to 
minor exceptions. As it is especially desired to make these notes 
of practical benefit, it will be found that at times the writer has 
not been content to simply state the law, but has made sugges- 
tions as to its application in everyday affairs. Technical accuracy 
has not been sought so much as a simple exposition of general 
principles, which at best are sometimes puzzling to the lay mind. 

The most satisfactory result which could follow the publica- 
tion of the foregoing pages would be to provoke the comment 
that they set forth nothing more than principles of ordinary 
right conduct and common sense. Of these the law should be, and 
aims to be, the exponent. 

It is obvious that the principles of the law, however well fixed, 
must be applied to such a wide variety of cases that they appear 
to assume different forms. It sometimes seems to the layman 
that distinctions made by courts and lawyers are more fancied 
than real, and at times the application of legal principles seems 
in individual cases to work hardship. It is only a superficial ob- 
server who joins the ranks of those who would complain of the 
technicalities of law, of the difficulties and delays in its admin- 
istration. The science of law is founded upon theories and teach- 
ings which are above and beyond any individual case. In the 
last analysis, the law is based upon ideas of fairness and justice 
which have been in process of development from the time when 
the Mosaic law was declared. If one could be absolutely certain 
that he could determine in any given case that which was abso- 
lutely fair, honest, straightforward, and equitable, and in accord- 
ance with the greatest public good, he could be perfectly sure 
that ultimately his view and actions based thereon would be sus- 
tained by the courts of last resort. 

The greatest lawyers have been those whose first thought in any 
case brought before them was always, "What ought the law to 
be?" It is said that Daniel Webster before he would accept a 
retainer always considered, not whether he could successfully 



410 LECTURE NOTES 

urge the contention of his clients but whether such contention 
ought to be sustained. If he could answer this question in the 
affirmative, he accepted the case ; if not, he refused it. Almost all 
litigation in the last analysis arises out of an attempt by one or 
more of the parties concerned to act in defiance of the abstract 
principles of justice referred to. If, therefore, a man desires to 
be successful in his relations with those about him, which is only 
a broader definition of contracts, he should be certain that he so 
rules himself that he not only serves his own interests but that 
he respects the rights of those about him. It is a mistaken im- 
pression prevalent in the minds of many that the only duties 
which are owed to our neighbors are those which are enjoined by 
printed statutes. 

Before the statutes were ever conceived the principles which 
they set forth were found in the moral law, which contained and 
contains not only those matters which have become the subject of 
legislative enactment, but also those ideals of duty and upright- 
ness which cannot be set forth by written words, and which speak 
most loudly and with a most conclusive force in the individual 
conscience. To think that these latter may be ignored with im- 
punity is a false idea. Sooner or later in the affairs of business, 
men will be called upon to square their actions with these precepts. 
If they are unable to do so the chance of ultimate success is small ; 
but conscious that he has acted in accordance with their teach- 
ing a man need not fear to submit the contracts and agreements 
of daily life to the judgment of any tribunal. 



I 



AGENCY 

By 
Howard E. White 

In notes previously prepared, the general subject of con- 
tracts has been considered, and an attempt made to give in a not 
too technical form the general principles which underlie all agree- 
ments. If these have been mastered it is now possible to proceed 
to a consideration of some special forms of contracts which the 
business or professional man is most frequently called upon to 
make. The general principles are common to all, but, in addition, 
each variety of contract gives rise to special rules, which must be 
considered. 

One of the most common acts of everyday life is to delegate 
authority to another, for some more or less general purpose. A 
moment's consideration will disclose to anyone how frequent this 
act is. It is often done so casually as to escape notice, but from 
the act of sending a street urchin to buy a morning paper to the 
broad power of attorney which the multi-millionaire gives to his 
confidential secretary the principle is the same, and the two oper- 
ations stand side by side before the law as the establishment of an 
agency. Let the terms which we are about to use be clearly 
defined. 

A Principal is one who delegates to another the authority to 
represent and act for him. 

An Agent is one to whom such authority is delegated. 

Agency is the relationship existing between Principal and 
Agent. 

An agency may be either general or special, depending upon 
the scope of the powers granted. It is general when the agent is 
empowered to represent his principal in all his affairs, or all his 
affairs of a particular kind. It is special when the authority is 
of any less extent. 

This distinction is of the utmost importance to consider, for 
it must be remembered that the relationship of agency concerns 
not only the principal and agent, but also those with whom the 



412 LECTURE NOTES 

agent deals in behalf of the principal. If the agent's authority 
to bind the principal is to be in any way limited, great care must 
be taken that the limitation be apparent to outsiders. 

The key to the relationship of agency which unlocks many 
doors, and makes simple the problems presented, lies in the con- 
sideration that the act of the agent within the scope of his author- 
ity is the act of the principal, as truly as though it had been per- 
sonally performed, and once performed the agent disappears from 
the operation, and leaves the principal alone involved. Much of 
the difficulty of the subject arises from a misapprehension of this 
fact. The agent is the alter ego or other self of the principal, and 
the law makes no distinction as to the liability of the principal 
between acts personally performed and those done by a duly 
authorized agent. 

It will at once be seen what an important subject agency is, and 
how great should be the care used in selecting an agent. 

Why Is Agency a Contract? 

At first sight it seems somewhat strange to denominate such 
a relationship a contract, but a moment's thought will show that 
the agreement of the agent to represent the principal, and of the 
principal to employ the agent, forms an obvious contract, for 
which the consideration is the remuneration received by the agent 
and the benefit received by the principal from being able to dele- 
gate certain duties to another. 

Establishment of Agency. 

An agency, like almost every other contract, may be created 
orally or by written instrument. The authority may be conferred 
either before the act contemplated or, in some cases, by a subse- 
quent approval and ratification of a previously unauthorized act. 

Let us suppose that A, without authority from B, should go 
to C, and purporting to represent B, purchase a stock of mer- 
chandise ; A or C then notifies B, and the latter acquiesces in A's 
acts. B thus ratifies A's acts and becomes bound thereby. Dis- 
affirmance of an unauthorized act must be prompt and complete 
if liability is to be avoided. It need hardly be said that ratifica- 



LAW OF AGENCY 413 

tion can only be predicated upon full knowledge of all the facts 
involved. Sometimes an agency is implied by operation of law, as 
where one person knowingly permits, without objection, another 
to hold himself out as a representative, and to enter into agree- 
ments in his behalf. 

Relationship Involved in Agency. 

A consideration of the relationships arising out of agency falls 
naturally under three heads : 

a. Relationship between principal and agent. 

b. Relationship between principal and third persons 
with whom the agent deals. 

c. Relationship of the agent to third persons. 
These three will be considered in turn : 

a. The extent of the agency depends entirely upon the agree- 
ment between principal and agent. It may be as broad or as 
narrow as the principal pleases, but it should always be clearly 
defined, otherwise endless trouble ensues from the commission 
of unauthorized acts. In all but the simplest cases the scope of 
the agency should be defined either by formal power of attorney 
or by a memorandum in writing. 

An agent who is authorized to accomplish a given result is 
usually considered, by implication, to be possessed of authority to 
do any act necessary to effect such end in a reasonable and pru- 
dent way. 

Practically speaking, the more indefinite the language defin- 
ing the power of the agent, the broader and more general will 
be his authority, and conversely, the more explicit the language, 
the more closely will the agent be held to its terms. It is a com- 
mon error for one who wishes to give a general power of attor- 
ney to make great efforts to enumerate every conceivable act 
which may be performed. Human foresight being fallible, the 
probability is that the one essential act will be omitted, with the 
result that the very explicitness defeats its own ends and the 
agent is confined to solely what has been enumerated. A half a 
dozen lines giving a general authority to act for the principal in 
every case, and enumerating almost no specific instances, would, 



414 LECTURE NOTES 

in general, result in granting a power so broad that little could 
be deemed beyond its purview. 

Principal. — The principal owes to his agent the duty of pay- 
ing the agreed remuneration for his services; of performing the 
agreements which his agent shall lawfully make in his behalf; 
and of saving the agent harmless from any personal liability for 
such acts. 

Agent. — The agent owes to the principal the duty of faith- 
ful performance of the acts committed to him, with reasonable 
diligence and prudence. He cannot make personal profit from his 
acts as agent ; all such profits belong to the principal. He occupies 
a position of the utmost responsibility, and is held to the highest 
measure of good faith. 

For a breach of these duties he incurs not only the danger of 
having his principal refuse to accept his acts, and so becoming 
personally responsible to those with whom he has dealt, but he 
may also be held liable to the principal for losses resulting from 
his acts. 

The only safe rule for an agent to pursue is to make absolutely 
certain that he clearly understands the limits of his authority, and 
then to transact the business entrusted to him with an eye abso- 
lutely single to his principal's interests. The thought of his self- 
interest must never swerve him a hair's breadth from his duty to 
the principal. 

It may sometimes occur that an agent will derive personal 
prestige from successful accomplishment of his principal's busi- 
ness, but he should never, without his principal's consent, derive 
pecuniary profit other than his agreed recompense. 

h. Principal's relation to third persons. These may be very 
briefly stated. 

So long as the agent does not exceed his authority, the prin- 
cipal is liable to third persons for every act which the agent may 
perform to the same extent as though such acts had been done in 
person. 

In addition, a principal is sometimes held liable to third per- 
sons for unauthorized acts of his agent, if guilty of carelessness 
or negligence in permitting his agent to perform such acts. 



LAW OF AGENCY 415 

An agent's unauthorized acts may take several forms: 

1. He may do an act totally unconnected with his agency, and 
which could not be considered by any prudent man as incident 
thereto. For such acts the principal is never liable if he promptly 
disavows responsibility. 

2. The agent may commit an unauthorized act which is in 
some measure related to his real duty and might reasonably be 
considered to be a part thereof by one not fully cognizant of the 
limitations of his authority. 

The question then is, whether the principal is bound by such 
an act. The answer is not altogether simple, but must be deter- 
mined by the following test : 

The principal is bound by all acts of the agent which are with- 
in the scope of the authority which the agent reasonably appears 
to have. In other words, the principal, to protect himself, must 
see that he never knowingly permits his agent to act in a way 
which would justify the public in supposing that the agent had 
powers which in fact he did not possess. 

This seems a somewhat harsh doctrine, but it is based upon 
the theory that if one takes the risk of delegating power to an- 
other he must be willing to accept all the reasonable consequences 
of so doing. 

3. An agent sometimes purports to act for a former principal 
after his authority has been revoked. What is the liability of the 
former principal ? 

A general agency once established is presumed to continue 
until notice is given of its termination. That is, when a third 
person has been in the habit of dealing with an agent, he is justi- 
fied in continuing to do so until notified that the agency is at an 
end. 

A principal is bound, therefore, if he would terminate an 
agent's power, to take every precaution possible to a reasonably 
prudent and cautious man, to notify all those with whom the 
agent has been dealing that the relationship is at an end. Other- 
wise, a principal may sometimes find that a former agent has 
involved him in liability and expense. 

c. Relation of agent to third persons. 



416 LECTURE NOTES 

When an agent obeys his instructions and does not exceed 
his authority, and lets it he known that he is acting as an agent, 
he incurs no personal liabiHty whatever. 

He may be held personally liable, however, for unauthorized 
acts which he commits, upon the theory that, having agreed to do 
something beyond the scope of his authority, it became in effect 
merely his personal venture. 

It sometimes happens that an agent, even though he be acting 
within the scope of his authority, neglects to tell the person with 
whom he is dealing that he is an agent. That is, he, to all appear- 
ances, is acting on his own behalf. If he does so, such third per- 
son has the option of holding liable either the agent or his princi- 
pal, upon discovering the latter's identity. It will thus be seen 
that it is extremely unwise for an agent to conceal his real stand- 
ing. It may result in heavy personal liability. If the exigen- 
cies of the principal's business require that his name should be 
concealed and the agent be the apparent party in interest, the 
agent should require ample security for assuming the risk 
involved. 

Principal's Liability for Agent's Wrongdoing. 

Heretofore we have treated of the agreements or contracts 
which an agent may make or purport to make for his principal. 
There is, however, another point to be considered. 

It sometimes happens that an agent inflicts actual physical dam- 
age either to the person or property of a third person. Thus, 
a truckman may so carelessly and negligently drive his employ- 
er's wagon as to cause injury to life or property. What is the 
employer's or principal's liability? 

It is closely akin to that arising out of the agent's agreements 
or contracts. 

If, when the accident occurred, the agent was engaged in 
doing that for which he was authorized, then his principal is 
liable for any carelessness or negligence of which he was guilty. 

A good example of this doctrine has recently come before the 
courts : 

A chauffeur, using an automobile in accordance with his em- 



LAW OF AGENCY 417 

ployer's orders, negligently runs over and injures a man. The 
employer is liable for damages. But let us suppose that the same 
chauffeur, knowing that his employer is away, uses the automobile 
to entertain a party of his own friends, and while so engaged 
negligently causes an accident. His employer is not liable. The 
reason for this is, obviously, that in the first case the agent or 
servant was engaged in the business which his master directed 
him to perform, while in the other he was acting in violation of 
his duty. 

So it will be seen that when the agent is acting within the 
scope of the authority which he apparently possesses his principal 
is responsible for all the results which follow therefrom, even 
though such results shall occur by reason of the carelessness of 
the agent. Here again will be seen the doctrine that if a principal 
entrusts to another a duty which he would otherwise personally 
perform, he must stand responsible for the acts of that individual. 

Duration of Agency. 

Like other contracts, an agency may be for a definite time 
or purpose, or it may be unlimited in duration. If the term or 
purpose of the agency be defined, it is obvious that at the expira- 
tion of the date or the performance of the designated duty the 
relationship terminates. If the agency is for an indefinite time, 
it may be terminated at any period that the principal or the agent 
choose, but it is, of course, obvious that the right to terminate 
when exercised by either the principal or agent against the wish 
of the other must be so exercised as not to inflict unreasonable 
harm. Thus, a reasonable notice of the intent to terminate an 
agency should be given. 

There is one exception to the right to terminate an agency 
without mutual consent. It sometimes occurs that an agent is 
given by his principal an interest in the business, which he is dele- 
gated to perform. Thus, an agent may be authorized to erect a 
certain building and be given as recompense a commission upon 
the cost. It would be obviously unfair to arbitrarily terminate 
this agency and deprive the agent of his interest therein. In such 
cases as these, where the agency is said to be coupled with an 



418 LECTURE NOTES 

interest, it cannot be terminated without the consent of the agent. 
Of course, even in this instance incompetency or other misbehav- 
ior on the part of the agent would justify its termination. 

An agency is also terminated at times by law. Thus, an agency 
to rent a particular building is terminated if the building be de- 
stroyed. So, the death or insanity of either principal or agent 
terminates the relationship. 

Capacity of Agent and Principal. 

Anyone who is legally capable of entering into an agreement 
is capable of employing an agent to do the same act. In default 
of such capacity in the principal, the agent has no authority, for it 
is clear that no person can transmit to another power which he 
does not himself possess. 

The inquiry as to the capacity of an agent is easily solved. 
Anyone who is physically or mentally capable of doing the act 
which he is authorized to do is capable of assuming the relation 
of an agent, irrespective of whether he would be able to person- 
ally perform the act in his own behalf. Again will be noted the 
fact that the agent simply stands in the position of his principal. 

Practical Suggestions. 

The foregoing gives a most fragmentary and condensed state- 
ment of the very important law of agency. It will have served 
its purpose, however, if it shall have disclosed the danger which 
an individual encounters when authority is delegated. In order 
to avoid repetition, much that is said under the general head of 
contracts has been omitted from the subject of agency. The two 
sets of notes must be read jointly. 

It is of the utmost practical importance, however, to all busi- 
ness and professional men that they should have a true under- 
standing of the power which they place in the hands of subordi- 
nates. It is a most customary thing to see employees placed by 
their superiors in positions of responsibility and in representative 
capacities where their power for harm is unduly great. Often, 
without the presence of any dishonesty, incompetency makes pos- 
sible loss and serious embarrassment. Every employer, therefore. 



LAW OF AGENCY ,. 419 

should scrutinize with extreme caution the work which he requires 
of his subordinates, particularly of those who are frequently away 
from his direct supervision. No subordinate should ever be per- 
mitted to make contracts or agreements for his employer until 
time and experience shall have proved his ability and worth. It 
frequently happens that an employee is given the authority to do 
an act which is harmless in itself, but which may justify the per- 
son with whom he deals in assuming that he possesses much 
wider power. Great care should be taken to avoid this serious 
situation. 

So far as the agent or employee is concerned, the problem is 
a much simpler one. So long as he makes certain that he possesses 
a thorough understanding of the duties which are required of 
him, and is always in a position to disclose the fact that he is 
acting in a representative capacity, he incurs no serious legal 
danger. 



" PATENTS AND PATENT LAW 

By 
William Raimond Baird 

Definitions. A patent is a grant by the government of the exclu- 
sive right for a limited time to practice an invention as claimed in 
the patent. It is a contract between the inventor and the govern- 
ment, in which, in consideration of the grant of the monopoly to 
the inventor, he must so describe his invention that a person 
skilled in the art to which it relates may from such description 
successfully practise the invention. 

No Natural Right to an Invention, It must be borne in mind 
that no person has a natural exclusive right to inventions which he 
may make. For instance, suppose in the early days of agriculture 
that a man invented a plough, using it in place of the former crude 
methods of turning up the earth, and made and used such a plough 
within sight of his neighbors. He would not have been injured 
had his neighbors at once copied his ideas and made and used other 
ploughs similar to those which he was using. He would still have 
the right to use his own plough to the extent of his ability over all 
the lands that he could control, and would lose nothing by the acts 
of his neighbors. Nevertheless, every man who has invented a 
new device feels that it belongs to him, and the government takes 
advantage of this natural feeling of ownership in intellectual con- 
ceptions to secure the use of such inventions for its citizens by 
holding out to the inventor the lure of a monopoly for a limited 
time. 

Value of the Patent System. Probably nothing has so contrib- 
uted to the advancement of the United States as an industrial 
nation as the patent system under which inventors have been pro- 
tected in the use of their inventions. It has given to every poor 
mechanic an incentive to improve his work, to every manufacturer 
an inducement to develop the skill of his artisans and employees, 
and to capitalists unusual opportunities for profit. It has built up 
industrial communities in portions of the country where agricul- 



PATENTS AND PATENT LAW 421 

ture is naturally a failure, and has so improved the arts that house- 
hold living has been cheapened in every direction, and comforts 
and conveniences have been multiplied to a degree unknown to any 
other community in the world. Probably every industry in the 
United States at the present time is based more or less upon 
patents, although in many industries, as, for instance, in flour 
milling, the earlier patents have all expired and have now become 
public property. 

The laws relating to patents, their acquisition and utilization, 
are all contained in Acts of Congress governing the subject, and 
litigations relating to patents are within the exclusive jurisdic- 
tion of the United States Courts. Neither the State Legislatures 
nor the State Courts have any jurisdiction over patents or litiga- 
tions concerning them, except in a collateral way. 

Statutory Requirements. Without citing the statute, it may be 
generally stated that the law requires that in order to be patent- 
able a thing must be an invention or discovery; it must be new, 
it must be useful, it must be an art, machine, manufacture or 
composition of matter, or an improvement thereof. It must not 
be known or used by others in this country before its invention 
or discovery here. It must not have been patented or described 
in any printed publication in this or any foreign country before 
its invention or discovery here, or more than two years prior to 
the application for patent, and it must not have been in public 
use or on sale in this country for more than two years prior to 
the application, and it must not have been abaiidoned. 

At first sight, these prerequisites seem readily comprehensible 
to anybody and to be couched in plain language, but the rights 
involved in patents have become so vast and important that the 
ingenuity of lawyers has been expended in the interpretation of 
these simple sentences, so that a vast body of constructions and 
decisions has grown up around them, and in many cases it is diffi- 
cult to determine just how they may be applied to any particular 
case in hand. 

In patent law the words "invented" and "discovered" mean the 
same thing, although colloquially they are often given a different 
interpretation. They do not mean the same thing in England. 



422 LECTURE NOTES 

In the United States to be an inventor a person must be the 
intellectual conceiver of the idea embodied in the invention, while 
in England it is only necessary that he should be the possessor of 
the invention, whether he originated it or not, and be the first to 
introduce it within the Kingdom. 

All new and useful inventions or discoveries are not patent- 
able ; for instance, a novel way of squaring the circle or comput- 
ing the area of an irregular figure, or a system of bookkeeping, 
or of recording facts, or a new method of levying taxes. An 
extreme case occurred when it was held by the court that the 
art of producing insensibility in the human body by the adminis- 
tration of ether was not patentable. This was because the 
inventor did not invent ether, but only found out that when it 
was used it had the new effect. It was held, however, that he 
was entitled to a patent upon the novel means employed best to 
administer the anaesthetic. 

Patentable Things. The things which are patentable are arts, 
machines, manufactures and compositions of matter. 

An art or process is- a way or method of doing something in 
distinction from the means made use of in doing it and the 
product which results from so doing. For instance, in the manu- 
facture of car wheels it is desirable that the body should be of 
a cheap material, like cast iron, and the rim of a more expensive 
and stronger material, like steel, and the problem presented was 
to so unite the steel rim to the cast iron body as to make a 
structure which was practically homogeneous and not liable to 
separate under stress of wear along the line of junction. To 
that end an inventor devised a method whereby a circumferential 
gate of sheet iron was placed at the line of separation of the 
metals which were poured into molds on opposite sides. Each 
metal was simultaneously molded in place and the gate was 
gradually melted, and the surfaces of the steel and iron were 
thus united together into a unitary structure. 

Another example of a process is as follows : As is well known, 
butter has long been separated from cream containing it by 
churning. An inventor discovered that by pouring cream upon 
a porous surface, such as blotting paper, the watery constituents 



PATENTS AND PATENT LAW 423 

of the cream would be absorbed by such surface while the butter 
fat would remain unabsorbed, whence it could readily be removed 
without churning and without the expenditure of any mechanical 
energy. 

A machine is an assemblage of bodies used to transmit or 
modify force for motion. In this broad sense a hammer or a 
lever is as much a machine as a complicated mechanism, like an 
adding machine or a steam engine. 

A manufacture is a product complete in itself and distinct 
from the process by which or the machine in which it is made. 
Thus, a piece of cloth or a lead pencil are both manufactures, 
and this is so whether they are used merely in the making of 
other things or not. For instance, a watch spring is only useful 
when properly assembled with other parts in a watch mechanism, 
but, nevertheless, it is a manufacture complete in itself. It is 
obvious that the word "manufacture" also includes the simpler 
form of machines, such as mechanical tools, like hammers, chisels, 
gimlets and saws. 

A composition of matter comprises new compounds brought 
together to accomplish some useful purpose, like, for instance, 
gunpowder, celluloid or rubber. In general, it includes all com- 
posite articles composed of two or more substances, whether they 
are the result of chemical union or of mechanical mixture. 

Requisites of Patentability. To be patentable any of these 
arts, machines, manufactures or compositions of matter must be 
useful and new and must constitute inventions. 

Utility. In patent law the word "useful" means not frivolous 
or pernicious. It means that the function performed by the 
invention must not be injurious to the morals, health or good 
order of society, but its utility need not be greater than other 
things of the same general class, and it need not be perfect in 
the performance of its function. Other things may perform 
the same function better, but that does not affect the utility of an 
invention which performs any function at all in a way which may 
be taken advantage of by a person desiring to use it. A toy, for 
example, is useful in the sense that it serves to amuse if not 
instruct children and others having correspondingly undeveloped 



424 LECTURE NOTES 

intellect, and a thing which is merely beautiful is useful in the 
sense that it serves to decorate and render pleasing the object to 
which it is attached or in which it is incorporated. 

Novelty. An invention to be patentable must be new, that is, 
must not have been known or used by others in this country 
before its invention or discovery here, or patented or described in 
any printed publication in this country or any foreign country 
before its invention or discovery here or more than two years 
prior to the application for a patent, and it must not have been in 
public use or on sale in this country for more than two years 
prior to the application for a patent, and it must not have been 
abandoned. It will be seen, therefore, that the question of 
novelty divides itself into several subdivisions. 

It must not have been known or used by others in this country 
before its invention or discovery here. It may have been known 
in a foreign country, and very generally known, but if that knowl- 
edge was not embodied in a printed publication or in a patent, 
whereby it could become accessible to the American public, it 
does not avail to anticipate a patent on the invention here. The 
courts have even gone so far as to hold that although there might 
be a number of people in this country who actually knew the 
invention that, nevertheless, the invention was not anticipated 
unless it had been put into use in this country. In other words, 
the courts have construed the expression "it must not be known 
or used by others in this country" as though it read "it must not 
be known and used by others in this country," and singular as it 
may seem, giving to the word "or" the meaning of the word "and" 
has not been an uncommon thing in our judicial procedure. 

If it is sought to negative the novelty of a patent by a printed 
description or by a prior patent, such printed description or patent 
must contain a description of the invention just as clear as that 
which is contained in the patent sought to be anticipated, and it 
must contain a description of the same invention and not of a 
similar one. The test to be applied to such an anticipation is, can 
a person skilled in the art to which it relates reproduce from the 
alleged anticipating description exactly the thing covered by the 
patent? If he cannot, and if he has to supply omissions and use 



PATENTS AND PATENT LAW 425 

his ingenuity in devising means to make clear ambiguous state- 
ments in the prior printed description then an anticipation does 
not exist. It has also been held that if the prior patent or prior 
description comprises both descriptive text and illustrations, that 
the illustrations without the text and the text without the illustra- 
tions are not sufficient to serve as an anticipation. The writer 
does not believe, however, that this rule would be followed if 
illustrations in such a case included technical conventional repre- 
sentations of things which would require no textual description to 
supplement them to make them clear. It might further be added 
that no printed publication is an anticipation if it has only been 
printed for private circulation or for distribution to a limited 
class of people. 

It also makes no difference whether the inventor knew of the 
existence of the anticipating device or not. The patent laws are 
intended to serve as a reward for producing things which are 
new, and if they are old to other people they cannot be new in 
any proper sense, although they may be new to the inventor who 
devised them for the second time. 

The device must not have been in public use or on sale for more 
than two years prior to the application for patent, and it must 
not have been abandoned. First, as to actual abandonment. Of 
course, this may be done by an inventor with the idea of giving 
the public a full right to practice his invention. This, however, 
seldom occurs. The difficulties which arise in connection with 
this matter are those which result from delay in making an appli- 
cation for a patent. If an inventor after having reduced his 
invention to practice delays a long while in making an application 
for a patent, it has been repeatedly held that such neglect con- 
stitutes an abandonment, unless it is fully excused by circum- 
stances over which he really had no control ; for instance, extreme 
poverty of the inventor, or mental or physical disorder great 
enough to generally incapacitate him for business. No delay 
constitutes an abandonment if during the time of such delay the 
inventor is endeavoring by experiment to perfect his invention and 
make it more useful, but a delay of several years between the 
perfection of the invention and the filing of an application for a 



426 LECTURE NOTES 

patent, taken for the purpose of profiting by practice of the inven- 
tion in secret is such delay as will constitute an abandonment, 
even if the inventor always intended to apply for a patent when 
he could maintain secrecy no longer. 

Placing the device in public use or on sale for more than two 
years prior to the application for a patent, as we have stated, nega- 
tives its novelty. What is public use is a question rather difficult 
to determine. If the inventor allows his invention to be used by 
other people generally, then, of course, it will be a public use ; but 
an experimental use, even if such experimental use is in public, 
if conducted in good faith for the purpose of testing the inven- 
tion and for no other purpose, is not such use as will negative the 
novelty of the patent. If, however, the main object of the use was 
profit to the inventor and improvement was only an incidental 
purpose, the use is not experimental in the eyes of the law, but is 
a public use. Public use by a stranger without the knowledge of 
the inventor more than two years before the inventor applies for 
a patent, constitutes just as much a public use as though it were 
by the inventor. 

A device is said to be on sale if it is offered for sale, whether 
any specimen of it is actually sold or not. If an inventor fur- 
nishes a specimen of his device for use on approval, to be paid for 
if successful, it is on sale if the use is successful and the device 
is paid for, but if the use is unsuccessful then it cannot be said to 
have been on sale. It is obvious, of course, that an inventor may 
make a thing long prior to the period of two years and may keep 
its use secret. Such use would, therefore, not be a public use, and 
if he did not offer it for sale during this time it would not be on 
sale, and consequently, the circumstances would not warrant 
declaring the patent invalid for that reason. 

Invention. A thing to be patentable must constitute an inven- 
tion. So far as is known to me no court has ever defined the 
term ''invention" as used in the patent law, but the courts have in 
hundreds of decisions decided that certain things do not constitute 
inventions, and from these negative expressions the rule must be 
.deduced as to what an invention really is. 

Technical skill is not invention, and by this is meant the tech- 



PATENTS AND PATENT LAW AZ7 

nical skill of the trained engineer, electrician or chemist, as well 
as that of the mechanic. For example, if a weight has been used 
to produce a constant tension upon some moving part in a 
machine, and it became desirable to economize space, any engineer 
would naturally suggest the use of a spring in place of the weight. 
In a similar manner any chemist would suggest the use of certain 
reagents to attain certain results which might seem marvelous to 
a person uninformed concerning chemical processes. The courts 
have held as a criterion of invention that where the line between 
it and technical skill is narrow, if a particular result was long 
desired and sometimes sought but never attained in a particular 
art, want of invention cannot be predicated of a device or process 
which first attained the desired result, on the ground that the 
means by which the result was secured were so simple that many 
people (after the event) believed that they would have produced 
it if the desirability of so doing had been called to their attention. 

It is not invention to produce a thing which differs from similar 
things in the prior art only in excellence of workmanship. For 
example, if an article has been badly made, it is no invention to 
make it better, or if it has been made with a rough exterior it is 
no invention to make it smooth. Mechanical skill is treated in 
law as the ability to plan improvement, and it is obvious that some- 
times mechanical skill will become invention, but excellence of 
workmanship in law is merely the ability to execute an improve- 
ment which has been planned. 

It is no invention to substitute superior for inferior materials in 
making a device or any of its parts. This seems quite obvious. 
For instance, the substitution of porcelain for brass in door 
knobs or of iron spokes for wooden ones in a wheel or the use of 
a coffee mill to grind corn, have all been held not to constitute 
inventions. But there are important exceptions to this rule. If 
the substitution of materials involves the development of new 
properties and uses, it may amount to invention. For instance, 
the substitution of rubber colored to resemble flesh (and which 
was not oxidizable) for metal as the material out of which plates 
to hold false teeth were made, was held to constitute an important 
invention. 



428 LECTURE NOTES 

Mere change in sise, form, degree or position of the parts of 
a device without materially changing their function will not con- 
stitute an invention. For instance, using powdered glue in place 
of flaked glue, changing the position of the propeller of a boat 
from the rear to the front of the boat, increasing or decreasing the 
size of a saw to do finer or coarser work have all been held not 
to constitute inventions. An exception to this rule occurs where 
the mere change in size or form creates a new and unexpected 
function. For instance, prior to the invention of the carbon 
electric light filament by Edison, which was less than one sixty- 
fourth of an inch in diameter, similar filaments of larger size had 
been employed, but the reduction of the cross sectional area of 
the filament to the size mentioned enabled a subdivision of the 
electric current to take place which had not theretofore been pos- 
sible. Consequently, the court, passing upon this invention, held 
that the change in size, accomplishing an entirely unexpected and 
useful result as it did, was entitled to be ranked as an invention 
although ordinarily such would not be the case. 

An aggregation of machines or parts, or other arrangement in 
succession, to perform each by itself the function which they 
previously performed alone does not constitute an invention. For 
instance, the Supreme Court of the United States held that there 
was no invention in adding the usual erasing rubber tip to a lead 
pencil although it was convenient, useful and new, because there 
was no joint action between the two things thus assembled. 
That is, the presence of the pencil did not help the rubber in its 
erasing function, and the presence of the rubber did not help the 
pencil in its writing function. It should be stated, however, that if 
two machines thus brought into juxtaposition require a novel 
means for coupling them together, invention may reside in such 
coupling means. 

Mere duplication or multiplication of parts does not constitute 
an invention. Single saws being in common use, it was held that 
no invention resided in mounting a number of saws upon the same 
axle in order that they might be simultaneously employed in 
cutting strips from the same piece of material. It has also been 
held that it constituted no invention to place two needles in the 



PATENTS AND PATENT LAW 429 

ordinary holder of a sewing machine whereby two rows of 
stitching were simultaneously made where previously one row 
only could be made. 

The omission of a part does not usually constitute an invention, 
unless the function of the machine remains undisturbed or is 
better performed when the part is omitted. If, by the omission 
of a part, economy results and the machine from which it is 
omitted has lost none of its efficiency, invention will probably be 
predicated upon such omission. But if the omission of the part 
means omission of the function which it previously accomplished, 
such omission must necessarily not constitute invention. 

The suhstitiition for one of a series of elements in an inven- 
tion of another element which performs an equivalent function 
is not an invention. For example, suppose that it has been 
desired to place a constant tension upon an element in a machine 
which has been secured by means of a weight. The removal of 
the weight and the substitution of a spring which will accom- 
plish the same purpose is not an invention. In the same way, in 
chemical compositions frequently an element of a group or series 
may be replaced by another element of the same group or series 
with no change in function. Thus, soda may be substituted for 
potash, lime for magnesia, and the like. 

It does not constitute an invention to use an old thing for a new 
purpose, unless the new use is non-analogous to the old use. For 
example, an inventor devised a method for preserving fish by 
placing the fish in a chamber from which the air was excluded and 
which was surrounded by refrigerating material. The Supreme 
Court of the United States held that this was a mere new use of 
the old and well-known use of an ice cream freezer, and conse- 
quently did not constitute an invention. If the use is in a non- 
analogous art, however, it may constitute an invention. Suppose, 
for example, that a tool useful in roofing could be reduced in size 
and adapted for winding a watch — the new use might be patent- 
able on the ground that the arts of making roofs and winding 
watches were so far apart that invention might be predicated upon 
such novel use. 

It ought to be said that the Patent Office is not so particular as 



430 LECTURE NOTES 

the courts in subjecting inventions to the tests which we have 
outHned, and that patents are frequently issued by the Patent 
Office which do not pass unscathed through such tests when they 
are brought before the courts for consideration in actual litiga- 
tions. 

Title in Inventions. Inventions may be made by single persons 
or by more than one person. If made by more than one person, 
they are said to be joint inventions. A joint intellectual concep- 
tion is a very rare thing, but it frequently happens in the actual 
practice of the mechanical arts that two, or even three, 
persons will work together simultaneously in the joint solu- 
tion of a mechanical problem and will finally secure a 
result for which no one of the parties can say that he was wholly 
responsible, and which no one can divide into separate parts 
which can truthfully be said to have been severally contributed 
by any one of them. 

It frequently happens that a person who has supplied money to 
an inventor to develop his ideas or to conduct his experiments, 
insists upon being joined with the inventor as a co-inventor and 
co-patentee. When this is done and there is no real joint inven- 
tion, contributed by each of the parties, it simply renders the 
patent invalid, because the patent laws contemplate that the 
patent shall be issued to the actual inventor and if the wrong 
person is chosen to make the application the law has not been 
complied with and the patent is void. 

The relations of an employer and employee in the exploita- 
tion of an invention, made by either one or the other, are trouble- 
some sometimes to define and separate. The fundamental prin- 
ciple governing this relation is that an invention belongs to the 
inventor, and the person who has contributed assistance to the 
inventor either in ideas, labor or money, is not entitled to be 
regarded as an inventor with him merely from that fact. Fre- 
quently, however, inventors are not mechanics and are not suffi- 
ciently practical to work out the details of an invention which 
they have conceived. Under such circumstances, they have to call 
in assistance. The presumption is in such a case that the man 
who conceived the idea and called in help to perfect it, is the 



PATENTS AND PATENT LAW 431 

inventor, and in order to overcome such a presumption the 
employee must show by the most convincing proof that he made 
the invention himself without suggestion or control of his em- 
ployer. On the other hand, if the employer merely suggested to 
the employee that it would be desirable to accomplish a certain 
result, without suggesting any means by which the result might 
be accomplished, and the employee by his own intellectual 
methods devised such means, then the employee would be entitled 
to the invention and to the patent. In such case, if the invention 
were embodied in a machine made by the employee in the em- 
ployer's time and with the employer's material, the employer 
would be entitled to the use of the particular embodiment of the 
invention so long as it lasted and would be entitled continually to 
repair it and keep it in proper working condition. 

No employer is entitled to patents upon the inventions of his 
employee merely because the relation of employer and employee 
exists between them. The law requires that an application for a 
patent shall be made by the inventor, and that any transfer of 
interest by him shall be by way of an assignment in writing 
drawn in a particular form and authenticated by two witnesses or 
by an acknowledgment before a notary. 

The Protection of an Invention. It goes without saying that 
the best way to protect an invention is to apply for and secure a 
patent upon it, but the inventor should adopt certain safeguards 
to protect his rights while he is perfecting the invention and 
before he is able to make a proper application for a patent. The 
government, when the patent laws were first enacted, endeavored 
to formulate a method of protecting inventions which had not 
been perfected by instituting a scheme known as a caveat. 

A caveat is a document describing an incomplete invention, so 
far as the inventor is able to do so, filed in the Patent Office with 
the intention that if another person files an application for a 
patent on substantially the same invention within a year, the 
person filing the caveat shall be notified and given a limited time, 
consisting of several months, within which to perfect his inven- 
tion. A caveat, however, confers no rights upon an inventor, 
and as it frequently happens that he is unable to precisely formu- 



432 LECTURE NOTES 

late the limits of his conception at the time when he files a 
caveat, the examiners in the Patent Office do not regard applica- 
tions for patents on essentially the same thing but differing in 
detail as interfering with such caveats. It is seldom that an 
inventor is notified of the filing of a rival application, and the 
caveat scheme has utterly failed of its purpose. Such is the per- 
sistence of tradition, however, among the mechanical classes that 
many inventors attempt to file a caveat, and frequently thereby 
jeopardize their rights by not endeavoring with due diligence to 
perfect their invention. 

Most inventors think that it is desirable to conceal what they 
are doing in the matter of perfecting their inventions before they 
make an application for a patent. Now, concealment from the 
general public is advisable, because if the idea is a good one it is 
apt to be copied by unscrupulous persons, but concealment to 
the point of absolute secrecy is foolish. As soon as an inventor 
has a clear conception of what he is seeking to accomplish and 
the means whereby this can be done, he should at once write out 
a description of his invention, accompanied by sketches or draw- 
ings, where possible, and should disclose it to at least two persons 
who are competent to understand it. Above all things he should 
not attempt to use his wife, sweetheart or some female relative 
as one of his witnesses to the existence of his invention. In many 
states a wife is incompetent by law to testify in favor of her 
husband, and in most instances such persons are incompetent by 
education to understand inventions which their male relatives 
make. If the invention is one which can be embodied in a full 
sized machine without prohibitive expense this should be done at 
once and no model should be made. The Patent Office attaches 
to the word "model" a peculiar technical sense, using it to indi- 
cate an assemblage of parts which illustrate an idea, but which 
are incapable of carrying it out. For example, the making of the 
parts of an ordinary single cylinder steam engine out of paste- 
board would fill the Patent Office idea of a model perfectly. A 
model, however, never constitutes what is technically called a 
reduction to practice of the invention, and, therefore, its manu- 



PATENTS AND PATENT LAW 433 

facture should be avoided, if possible, and the energies of the 
inventor should be directed toward making the actual thing. 

If the invention is a composition of matter, it should be 
assembled together as quickly as possible and tested. If it is a 
process, the steps of the process should be carried out as quickly 
as possible, and the necessity for limits of temperature and 
similar elemental principles should be ascertained. If it is a 
product of manufacture, it should be made in practical com- 
mercial form as soon as possible. 

The reason for these precautions is that the Patent Office and 
the courts regard as the first inventor and the person entitled 
to a patent, that person who first reduces the invention to practice. 

Several years ago in an interference proceeding (hereafter to 
be described) the Patent Office held that the filing of an 
allowable application for a patent was equivalent to an actual 
reduction to practice of an invention. In the case referred to 
the application for a patent described a very simple engineering 
structure which could be readily and completely understood 
from mere inspection, and their decision was undoubtedly right. 
This doctrine has, however, been extended to include all appli- 
cations for patents relating to all classes of inventions, and as 
inventors are imaginative, it frequently happens that they 
describe in their applications for patents inoperative inventions, 
and in the accompanying drawings illustrate devices which can 
by no possibility be made. But if the Patent Office fails to dis- 
cover that the described inventions are inoperative, the officials 
will decide in favor of a person who first filed such an application 
for a patent as against some other inventor who later actually 
reduced the invention to practice in concrete form. Therefore, 
it is desirable for every inventor to file an application for a patent 
on his invention just as soon as he can possibly do so, because this 
takes the place in the patent law of the actual construction of a 
device embodying the invention, and saves the necessity of 
proving the existence of the invention by witnesses and the exist- 
ence of models. 

The Patent Office is a bureau of the Department of the 
Interior, located at Washington. It is presided over by an official 



434 LECTURE NOTES 

called the Commissioner of Patents, with several assistants and 
with a large corps of examiners, each of whom has one or more 
assistants to help him in his work. 

It is the intention of the law that every application for a 
patent should be examined by one of the examining corps of the 
Patent Office, in order that the rights of the public may be pro- 
tected and the issuance of patents comprising non-patentable 
things prevented. 

The officials of the Patent Office are of varying degrees of 
competency and education, and it therefore happens frequently 
that patents are rejected which should be allowed, and that others 
are allowed which should be rejected, and consequently the 
issuance of a patent affords no guarantee to the inventor that it 
will act as a protection for his invention without effort and ligi- 
gation on his part. 

The Application for a Patent. This consists of first a petition 
which is couched in a precise form prescribed by the Patent 
Office, and which requests that a patent be issued to the appli- 
cant, setting forth his nationality, name and address, and in very 
general terms the nature of the invention sought to be patented ; 
second, of the specification, which is made up of two parts, 
namely, a description of the invention, which refers to illustrative 
drawings, where it is possible to use drawings for that purpose, 
and claims. The nature of claims will be considered hereafter. 
The third paper of the application is an oath, in which again the 
applicant sets forth his nationality and residence, and swears 
to his belief that the described invention was not known or used 
before his invention or discovery thereof, or patented or described 
in any printed publication in any country before his invention or 
discovery thereof or for more than two years prior to his appli- 
cation, or in public use or on sale in the United States for more 
than two years prior to his application, and that it has not been 
patented in any country foreign to the United States on an appli- 
cation filed more than a certain limited time, and that no appli- 
cation for a patent has been filed in any foreign country, or if 
filed, when, and in what countries. 



PATENTS AND PATENT LAW 435 

These papers should be prepared with great care, and the rules 
of the Patent Office relating to their preparation should be fol- 
lowed exactly. Inventors frequently think that they can 
describe their inventions better than anyone else, and yet more 
frequently think that they can make drawings suitable to illus- 
trate their inventions better than anyone else. Both these beliefs 
are usually unjustified. Drawings should be made by drafts- 
men skilled in doing this particular work, in order to comply 
with the many minor requirements of the Patent Office in this 
respect, and the description and claims should be prepared by a 
skilled attorney. 

Patent Solicitors and Lawyers. In the United States it is 
seldom that an applicant attempts to prepare and prosecute his 
own application for a patent. He usually employs a patent 
solicitor. This is a class of persons who have learned to carry 
on this particular business. Down to the year 1880 most patent 
solicitors were persons who had had some training inside of the 
Patent Office as clerks or examiners, or who had had a technical 
training as engineers or chemists, or who had endeavored to 
learn the business in some other way. These persons, acting for 
the applicants for patents before the Patent Office under powers 
of attorney from the applicants, became known from that fact 
as patent attorneys, and many of them making misuse of the 
term "attorney" have endeavored in every way to create the im- 
pression that they are attorneys at law, such not being the case. 

Since the year 1880 and the organization of the combinations 
of capital controlling large industries, which are commonly 
called trusts, the soliciting of patents for such interests before 
the Patent Office has usually been entrusted to lawyers who have 
by training in technical schools or otherwise acquired the neces- 
sary knowledge of the arts and sciences to enable them to prac- 
tise before the Patent Office. 

Patents are of little value until they have been made the sub- 
ject of litigation in the courts to determine their scope and valid- 
ity, and it is obvious that if the application for a patent has 
been entrusted to a competent lawyer, his familiarity with court 
procedure and the way in which judges decide cases, and his 



436 LECTURE NOTES 

ability to weigh court opinions and the Hke, result in far better 
patents than those taken out by persons without legal training. 

This situation has offered an additional inducement to those 
who are merely patent solicitors to make a misuse of the word 
"attorney" as above stated. Other things being equal, patent 
business should, therefore, be entrusted to lawyers rather than 
persons who have not had a legal education. 

Under the patent laws of England, from which our patent 
system was originally derived, the inventor in his application 
papers described how to practice his invention, and left it to the 
public who subsequently read his description to determine what 
the limits of the invention were and to ascertain by research what 
was new in it from what was old*. And at first this was the pro- 
cedure adopted in the United States. This led unscrupulous 
inventors to patent immaterial improvements in the arts and in 
their patents describe and thus cover many things which they 
had not themselves invented. This resulted in an amendment to 
the patent laws requiring an applicant to point out at the end of 
the specification plainly and distinctly what he claimed to he new. 
Consequently if a patent is examined there will be found at the 
end of the specification a number of short statements, called 
claims, setting forth in curious technical language a concise 
statement of just what the invention claimed consists of. 

When an application for a patent is made before the office 
and is referred to an examiner, the first thing that he does is 
to look at the claims made. Frequently his knowledge of the arts 
enables him to at once refer to prior patents or publications which 
anticipate the claims as made, and he sends to the inventor a 
short statement reciting that "claim 1 is rejected on the patent 
to Smith," "claim 2 on the patent to Jones," and the like. Under 
the Patent Office rules an applicant has the right to amend his 
application, so long as he does not depart from the original 
invention, as often as he pleases, and when such a rejecting com- 
munication is received from the Patent Office the inventor or his 
attorney proceeds to amend the claims and narrow the invention 
to avoid the references made. A contest thus ensues between 
the Patent Office and the inventor, the inventor endeavoring to 



PATENTS AND PATENT LAW A2>7 

get claims as broad as possible, and the Patent Office endeavoring 
to restrict them. The result of this system is that the claims of 
a patent constitute its most important feature, and the office of 
the description in the specification is in reality only to aid in the 
interpretation and construction of the claims. 

If the official publication of the Patent Office, which is called 
The Patent Office Gazette, and which contains a selection of a 
limited number of claims from each patent issued, be examined, 
the layman will be struck with the curious language in which the 
claims are couched and the apparent endless repetitions of the 
same statements in many claims, but it will be found upon a 
closer examination that no two claims ever cover precisely the 
same subject-matter. The Patent Office allows the applicant to 
practically make as many claims as he pleases, and he, therefore, 
within the scope of the invention, endeavors to make claims 
which will cover immaterial variations from the subject-matter 
of the invention, in order to prevent infringers from adopting 
the principle of his invention by making changes which will not 
fall under the language of the claims, but which will, neverthe- 
less, contain their elements in substance. 

The following will serve as illustrations for claims covering 
process and machine and composition of matter and product, all 
developed out of the same invention, which has previously been 
referred to as the separation of butter fat from cream. For 
instance, let us suppose that an apparatus for the contemplated 
treatment consisted of a casing mounted upon a spindle and 
actuated by gearing and that the casing contained a porous lining 
provided with an inlet and outlet port, and that a vacuum pro- 
ducing pump was connected to the interior of the casing by a 
suitable conduit. Claims might be drawn upon the different 
inventions involved or developed from the fundamental idea as 
follows : 

The claim for a process might read : 

The art of making butter which consists first in separating the 
cream from the milk, second, placing the cream in a receptacle 
permeable to the liquid and impermeable to the solid constituents 



438 LECTURE NOTES 

thereof, and third, allowing the separation to take place out of 
contact with the outer air and under pressure lower than the 
atmospheric pressure. 

The claim for the machine might read : 

A machine for making butter, comprising means for separating 
the cream from the milk, means for removing the separated 
cream from the milk, means for removing the liquid from the 
solid constituents of the cream, the whole enclosed in a casing 
provided with means for creating and maintaining a vacuum 
therein. 

The claims for the product might read as follows : 

As an article of manufacture, butter consisting of unbroken 
globules of fat having no liquid film surrounding the same, and 
having a specific gravity of 1.8. 

While a claim for the composition of matter within the casing 
might read as follows : 

A composition of matter consisting of four parts by weight 
of milk condensed to one fourth of its original volume and de- 
prived of its salts, and one part by weight of butter fat con- 
sisting of unbroken globules. 

In the case enumerated it will be seen that in order to properly 
protect the invention it is necessary to take out at least four 
patents thereon. 

With respect to the quality of their claims, patents are divided 
into generic and specific, and basic and subsidiary patents. 

A generic patent is one the claims for which cover an entire 
series or family of operations, while a specific patent is one in 
which the claims cover one of several species of ways, methods, 
or means for accomplishing a general result. 

A basic patent is one which covers a new art, like the art of 
telephoning, while a subsidiary patent is one which covers a 
relatively minor improvement in the art. 



PATENTS AND PATENT LAW 439 

Inventors talk very loosely about having basic patents upon 
inventions, when they mean that in their opinion the claims of 
a particular patent are somewhat broad in their nature, but 
actually, a basic patent is one of the rarest things in patent prac- 
tice, and usually there are only four or five basic patents issued 
in a generation. 

The Patent Document. The terms of the patent grant are 
decidedly misleading in one respect, to which attention should 
be called. The language employed, which is written upon the 
cover of the patent, inside of which is placed the specification, is 
as follows: 

"These letters patent are to grant unto John Smith, his heirs 
or assigns for the term of seventeen years from the first of 
January, 1911, the exclusive right to make, use and vend the 
said invention throughout the United States and the Territories 
thereof." 

Naturally, inventors are inclined to believe that a formal docu- 
ment issued by the government means what it says, but it don't, 
as may readily be illustrated by a convincing example. 

The inventor of the ordinary sewing machine invented a needle, 
the eye of which was at or near the point as contrasted with the 
former ordinary style needle in which the eye was near the 
shank. This new construction of needle enabled the same to be 
reciprocated to and from the work and to carry the thread 
without entanglement. When sewing machines were first made 
the cloth operated upon had to be held in front of the needle by 
the operator. Another inventor seeing this difficulty invented 
what is called the presser-foot, which is a small device spring- 
pressed down against the work to hold it in place, in combina- 
tion with a little ratchet-like arrangement underneath the work 
called the feed-dog, to move the work forward under the presser- 
foot, thus obviating the necessity of the operator holding the 
work. Now when the second inventor applied for a patent, his 
means employed being entirely new, it was granted to him, and 
his claims covered the construction of the presser-foot and feed- 



440 LECTURE NOTES 

dog. Under the terms of the grant of the patent which he 
received, giving him the exclusive right to make, use and vend 
his invention throughout the United States, he naturally would 
think that he had the right to use the invention, including the 
cooperating eye-pointed needle, but the eye-pointed needle was 
already covered by the patent of the original inventor, so that 
necessarily the language of the second patent was construed to 
mean that he had the right to make, use and vend his invention 
but with the implied condition that it was "subordinate to the 
rights of all prior patentees concerning the subject-matter of the 
cooperating means necessary to make his own device operative 
and for which patents have been already issued." 

But the second inventor could prevent the first one from using 
his invention, and it will readily be understood from this state- 
ment that the grant of the patent does not in terms grant a 
positive right to use an invention which is described in the patent, 
but grants him the right to exclude others from making, using 
and selling a particular improvement or thing which he himself 
has invented and patented, and patents ought to be expressed 
in that language. 

Interferences. It frequently happens that two, or even more, 
inventors simultaneously make applications for patents upon the 
same invention at the same time. Under the system of classifi- 
cation adopted by the Patent Office such applications necessarily 
come under the eye of the same examiner, and when he ascer- 
tains this to be the fact the Patent Office institutes a proceeding 
called an ''Interference,'' in order that it may be determined 
who is entitled to receive the patent. 

The rules governing interferences are too numerous and too 
technical to discuss here, but, in general, it may be said that the 
first applicant, other things being equal, is entitled to the patent, 
but he is not so entitled if a subsequent applicant actually 
reduced the invention to practice before the first applicant and 
diligently proceeded to put his invention into practice and to 
make an application for a patent thereon. Of two inventors who 
made a reduction to practice at substantially the same time the 
first conceiver is entitled to the patent, provided he was using 



PATENTS AND PATENT LAW 441 

due diligence in perfecting the invention and in reducing it to 
practice. 

When an interference has been declared the Patent Office 
requires each applicant to state, under oath, when he first con- 
ceived his invention, when he first disclosed it to other people, 
when he first made sketches and drawings, when he first reduced 
the invention to practice, and to what extent it has been put into 
practical operation. These statements are made by each party 
without any knowledge of the dates of the opposing party. After 
these statements are opened by the Patent Office and each party 
permitted access to the other party's papers, attempts are fre- 
quently made to amend by alleging that the dates are wrong, and 
that dates anticipating those of the opposing party should be 
substituted. This practice is not permitted by the Patent Office, 
and the parties are strictly held to their dates in making proof 
of their assertions. Consequently it is necessary in preparing 
such statements that great care should be taken to be very exact, 
and that no dates should be alleged for these different acts which 
cannot actually be proven. 

The Utilization of a Patent. After a patent has been secured 
the inventor naturally desires to utilize it and make money out 
of it. A warning should be given against patenting inventions 
when the inventor does not know how he is going to dispose of 
them after he secures the patents. The world is usually skeptical 
concerning the value of a patent or of the invention which it 
describes, and reluctant to part with money to enable the inventor 
to realize a profit from his invention, and those inventions are 
usually most profitable which are made by persons skilled in 
arts in which they are actually engaged in business, and who are 
thus enabled to utilize their inventions and the monopolies given 
to them by patents covering those inventions in the perfection of 
products which they know how to make and sell. It is very 
seldom that a man makes an invention outside of an art with 
which he is acquainted which is of any practical value. 

The title to a patent resides in the patentee. He can sell the 
patent outright by a written instrument called an assignment, in 
which case, of course, his interest in the matter ceases. He can 



442 LECTURE NOTES 

sell a part interest in the patent by an assignment, in which case 
he retains an interest in the invention. 

All the civilized nations have patent systems, and in only a 
few of them does the law require an application for a patent to 
be made by the actual inventor, as is the case in the United 
States. 

Assignments of patents are frequently drawn where the in- 
ventor only intends to sell his United States patent, but in which 
the language used constitutes a transfer of the invention, as well 
as of the United States patent. If such language is employed, 
contrary to the intent of the inventor, it gives to his assignee the 
right to apply for patents on the invention in any country where 
an assignee may do so. This is one of the pitfalls which a 
patentee has to look out for in disposing of a patent. 

If an interest in a patent is assigned, say a fractional part, like 
one fourth, a curious situation results. Two patentees owning 
undivided interests in a patent are in law called joint owners, and 
each patentee owns the whole invention, so that each patentee 
may issue licenses or otherwise dispose of interests in the inven- 
tion without paying anything to his co-owner from what he may 
receive from the persons to whom the interests are transferred. 
The only way to avoid this contingency is to recite in the instru- 
ment of assignment disposing of an undivided interest in a patent 
either that no subordinate right shall be granted without the 
consent of all of the owners, or that if such rights are granted 
a proportionate part of the consideration received shall be divided 
among the owners in proportion to their respective interests. 

A common way to utilize a patent right is to license persons 
to use the invention within a particular territory or for a Hmited 
time, or both, upon payment of a periodical sum, usually called 
a royalty. Agreements of this kind are frequently profitable, and 
if a patentee is not himself engaged in a business to which a 
patent relates, he will find it wise to license anyone in the busi- 
ness, in order that he may secure as wide a market as possible 
for his invention. Licensees, however, frequently do not properly 
account to patentees for their doings, and they have been known 
to keep two sets of books, one for their own use and one for the 



PATENTS AND PATENT LAW 443 

inspection of the patentee. Various devices to prevent such 
dishonest practices have been devised by patent lawyers, such 
as the use of adhesive stamps placed upon the products of 
machines, counting machines secured to the actuating shafts of 
patented mechanism, or the like. 



' EMPLOYERS' LIABILITY AND WORKMEN'S 
COMPENSATION 



By 

Edmund Dwight 

It is a peculiar pleasure to speak on the subject of Employers' 
Liability and Workmen's Compensation to a body of men who 
belong, or will soon belong, to the creative class of the community. 
The subjects have been considered by legislatures, by commissions 
appointed for the purpose, by lawyers, economists and theorists; 
by insurance companies who underwrite the financial loss in- 
volved in the working of the principle, and by financiers whose 
investments are in industrial properties ; but so far as I have ob- 
served in the more or less voluminous literature on the subject, 
it has received scant attention in either the education or the delib- 
erations of the men who have the actual supervision of bodies 
of working men and who design and control the mechanical pro- 
cesses which they use. 

The problems involved are social, or, rather, human as well as 
financial. In fact, they are first human and, second, financial prob- 
lems. The men who can best solve them are the men in such pro- 
fessions as those which will be yours. 

The doctrines of employers' liability and workmen's com- 
pensation are artificial and legal efforts to overcome some of the 
hardships, wrongs, and sufferings growing out of industrial 
operations. 

Few men, unless they be surgeons in a hospital near the scene 
of any active work, realize the enormous cost in human life and 
limb in every step of industrial human progress. There is practi- 
cally no process of manufacture or construction, from the simple 
making of a pair of shoes, or a hat, or the garment we wear, to the 
building of a bridge or the boring of a tunnel, which does not take 
its toll in blood. 

The importance of this subject is often underestimated, but it 
is possible to get a vivid and realizing sense of its magnitude by 



LIABILITY AND COMPENSATION 445 

the consideration of some statistics. I had assembled some of the 
figures which seem pertinent as illustrations and from these fig- 
ures I had drawn certain inferences. Instead of giving them to 
you, I will read part of an address delivered just a week ago be- 
fore the League for Political Education, by John Mitchell, the la- 
bor leader and economist. Mr. Mitchell undoubtedly had access to 
much of the same data that I had availed myself of and his facts 
and some of his conclusions are nearly identical with my own. 
His statements are so recent that I prefer to use his own words 
and his views come with added force because of his known posi- 
tion in the field of labor. Mr. Mitchell states as follows : 

"These subjects concern, in a very large way, all the people of the state 
and nation, although they affect more immediately the workingmen, because 
it is upon them that the burden falls with crushing weight, and it is they 
and their dependents who suffer the direct and terrible consequences of 
such accidents. The greatest disaster that can befall the family of a wage 
earner is to have the father and bread-winner carried lifeless into his home, 
and the shock of this calamity comes with added force when the death 
is due to an industrial accident, yet in our country this tragedy is enacted 
more than 100 times each day, more than 35,000 times each year. 

"It is, of course, inconceivable that the gigantic industrial movements 
of the American people should be conducted without some fatalities. The 
industrial structure is a huge machine, hard running, and with many 
unguarded parts, and many of the fatalities, many of the deaths in general, 
are simply and solely the result of conditions beyond human control and 
inseparable from the ordinary course of existence. But thousands upon 
thousands of easily preventable accidents and fatalities occur each year, 
and it is from these that we should strive to get relief. 

"In the United States, the number of persons killed and injured is not 
even officially counted, but William Hard, a well-known writer, credits 
the American Institute of Social Service with the statement that 536,165 
workmen are killed or maimed every year in American industry, while 
Dr. Hoffman, statistician of the Prudential Insurance Company, has esti- 
mated the annual number of industrial accidents at approximately 2,000,000. 
As a matter of fact, however, the death roll of industry is longer than is 
evident from obtainable figures. No one can compute, of course, the num- 
ber annually yielding up their lives or compelled to become a burden upon 
their friends or relatives or dependent upon the charity and munificence 
of society, who have come to their death or disability as a result of disease 
contracted in their occupations. 

"It is a strange commentary upon our boasted American civilization 
that in the United States nearly three times as many persons, in proportion 



446 LECTURE NOTES 

to the number employed, are killed or injured in the course of their em- 
ployment as in any other country of the world. 

"The victories of peace have their price in dead and maimed as well as 
do the victories of war. If the American people could understand that 
more persons are killed or injured annually while following their daily 
occupations than were killed and wounded in any one year of the Civil 
War; if they could realize that more men are killed annually in the mining 
or in the railroad industry alone than were killed from the Continental 
armies in the entire eight years of the American Revolution; if they could 
appreciate the terrible significance of the statement of Colonel Roosevelt 
that 'the casualties attending upon peaceful industries exceed those which 
would happen under great perpetual war,' they would give their co- 
operation heartily and enthusiastically to the various agencies that are now 
striving to abolish, as far as possible, the cruelties, the losses, and the 
widespread miseries which are caused by the hazard of industrial pursuits. 



"As an illustration of what has been accomplished in Europe through 
wise legislation, and as an evidence of what could be accomplished by 
proper legislation in the United States, your attention is directed to the 
fact that, taking all the mining countries of the old world, the average 
annual number of industrial fatalities is only 1.45 out of 1,000 employed, 
whereas in the United States, the average annual number of fatalities in 
mines is 3.46 out of 1,000 employed; in other words, for each 10,000 men 
employed in the mines of European countries, fourteen are killed annually, 
while for each 10,000 men employed in the mines of the United States, 
thirty-four are killed annually." 

Bear in mind that for every case of injury, there are days or 
weeks or months and often years of acute suffering, and multiply 
them by the number of injured and you can get some conception 
of the amount of physical suffering resulting from industrial acci- 
dents. Bear in mind that a large percentage of those who are 
killed and who are in a great proportion men in the prime of Hfe, 
leave behind them dependent families and you can get a further 
idea of what industrial accidents mean in any community. Now, 
gentlemen, I have given you these figures and I have drawn the 
picture very strongly, because I want to impress that aspect of 
the subject on your minds in the strongest way; it is the human 
side of the problem. I have told you that there is also a financial 
side. 

It is impossible to even guess at the actual loss in money which 



LIABILITY AND COMPENSATION 447 

this record of death and injury involves. As a single item of cost 
there was paid during the year 1910, more than $25,000,000 for 
liability insurance premiums in the United States alone. This 
sum was paid by employers of labor simply to protect themselves 
against the legal consequences of accidents. It is mere moiety of 
the actual money loss caused by industrial accidents, because, in 
addition to these sums, an unrecorded, but vast amount has been 
paid direct by the employers to their injured employees and, of 
course, the injured people themselves who, in a large percentage 
of cases, have been only compensated by a portion of their earn- 
ings, are large contributors, through their own loss of wages, to 
the total financial cost. 

There has, of course, always been an effort on the part of the 
injured employee to shift the burden of the financial loss upon 
his employer, and this brings us to the consideration of the means 
which the law has given him to get reimbursement for his injuries. 

Prior to 1871, the only way in which a workman injured in his 
employer's service, or his estate if he were killed, could recover 
damages, was by an action under the common law. Under the 
common law the judges who pass upon the issues involved in any 
suit are limited by the precedents which the courts have already 
established, and under the precedents which up to that time had 
been established, it was very difficult for an injured workman to 
get what now seems to us a just or equitable treatment of his 
claim for damages, because the employer was permitted in his own 
behalf to plead a variety of defences which constituted a bar to re- 
covery. It was not until 1871 that any serious attempt was made, 
so far as general labor was concerned, to regulate the subject by 
statutory laws. In that year Germany passed the first Employers' 
Liability Act. By this Act some of the defences which under 
the common law the employer had been permitted to plead in his 
defence, were removed, and the chance of recovery by the work- 
man was thereby increased. In 1880 England passed such an act. 
In this country no Employers' Liability Act was passed until 1885, 
when Alabama adopted an Employers' Liability Act; being fol- 
lowed by Massachusetts in 1887 ; Indiana and Colorado in 1893 ; 
Utah and Mississippi in 1896 and New York in 1902. Since then 



448 LECTURE NOTES 

and until the recent legislation which has been sweeping over the 
country, little has been done by different states in the direction of 
intelligent employers' liability acts. Now, as I have explained 
to you, an employers' liability act, simply recognizes that which 
the common law has from very early times recognized, that any 
man has the right to collect damages from any other man who has 
done him an injury. Such acts, however, endeavor to make the 
matter of the enforcement of his legal right to collect damages 
for an injury, one of easier accomplishment than was possible 
under the common law, and they hold the employer to a greater 
degree of responsibility than the common law did. It is an old 
established principle of the common law that an employer is 
bound to furnish his employee with a reasonably safe place in 
which to do his work, with proper and sufficient tools, and with 
competent fellow workmen. Under the common law, as origi- 
nally interpreted, this was virtually his sole duty, and if thereafter 
through the negligence of anyone, superintendent, manager, fore- 
man or workman, an accident occurred by which other employees 
than the one directly responsible for the accident were killed or 
injured, the employer could not be held liable, unless it could be 
shown in behalf of the claimant that the person responsible for 
the accident was incompetent. 

The most important feature of all employers' liability acts 
is that the employer himself cannot escape liability provided the 
person guilty of the negligent act was in any possible sense di- 
rectly representing the employer or acting in a supervising capa- 
city. Now these acts did permit many cases to be brought to trial 
and many verdicts recovered against employers that would not 
have so resulted under the common law. But the passage of the 
acts did not in any degree, whatever, reduce the number of suits 
which were brought, or enable the injured employee to sue and 
economically get a reimbursement for his lost time. And going 
back to 1871, we find that Germany had hardly begun to work 
under its Employers' Liability Law before it was found to be un- 
satisfactory and to the disadvantage of both the employers and 
the employees. 

Germany, as you know, is a country in which social problems 



I 



LIABILITY AND COMPENSATION 449 

are earnestly considered and carefully studied. The German 
thinkers who were dealing with this problem a generation ago had 
reached the conclusion which some of our own legislators are now 
reaching, that such a system was wasteful and unsatisfactory. 
They recognized the fact that in all industries, accidents are inevi- 
table and that following such accidents and in addition to the 
physical suffering caused by them there was not only an economic 
loss, but a loss which was unevenly distributed ; that it was borne 
in a large percentage of cases by those who could least afford to 
stand it. Their conclusion was that if the accidents and the phys- 
ical suffering following could not be prevented, at least the 
money loss following should be distributed so that the whole of 
it would not fall on the victims of the accident. They realized 
also that to attempt to look too closely into the cause of accident 
and by placing the responsibility in one place or another to shift 
the burden of the loss could have no good result, and in 1884 
Germany swept away at one blow the whole theory of the liability 
of the employers for their own negligence and substituted in its 
stead the Compulsory Insurance Law, which, in much the same 
form, still stands and has been adopted by other north of Europe 
countries. England, which as I have told you, passed an Employ- 
ers' Liability Act in 1880, gave that law a somewhat longer test, 
but in 1897 virtually abandoned it. It did not adopt the German 
Compulsory Insurance Law, but adopted what was known as a 
Workmen's Compensation Law, and since that time most of the 
countries which generally follow Germany in social legislation 
have adopted the German Compulsory Insurance Law, and those 
countries which are apt to follow England in such legislation, 
have adopted a Workmen's Compensation Law. The difference 
is this: Under the German law the employer and the employee 
must each pay a certain sum to an insurance company controlled 
by the Government and thereafter the employer has no responsi- 
bility whatever to make payments to his injured employees. They 
look in all such cases to the insurance company, which is in fact 
the Government. Workmen's compensation laws follow an en- 
tirely different principle. The employer is not bound to make any 
provision in advance for his employees; nor are the employees 



450 LECTURE NOTES 

bound to contribute to any fund for their own subsequent benefit, 
but the employee who is injured in his employer's service has a 
right, irrespective of any question of negligence, to recover from 
his employer a certain proportion of the wages which he has lost 
by reason of the accident, or if he is killed, those who are depend- 
ent upon him are entitled to a payment of a fixed sum related 
to his wage and earning capacity. 

Now, let me again state these three systems : 

Under the common law, or where only an Employers' Liability 
Act exists, an injured employee can recover only by a suit in 
which in effect he proves that his employer caused the injury. 
Under the compulsory insurance, or German system, the whole 
matter of payments for injuries to injured workmen is taken out 
of the hands of the employer and by arrangement made at the 
time of service is shifted to insurance companies which are in 
effect the Government. Under the workmen's compensation 
laws it is not necessary to prove any negligence whatever on 
the part of the employer, but the personal relation between em- 
ployer and employee is still maintained, for in such cases the em- 
ployer himself must make a specific payment to the injured em- 
ployee. The only modification of this latter rule is that, under 
the English Workmen's Compensation Acts, the employer may 
by the payment of a premium to an insurance company substitute 
such a company for himself in the responsibility to pay compen- 
sation to the injured employees. 

The history of employers' liability and workmen's compen- 
sation legislation in this country is interesting and is regrettably 
illustrative of the American way of treating some serious sub- 
jects as compared with the German and the English method. 
Probably no economist has for the past generation seriously ques- 
tioned the idea that justice and humanity alike require that the 
cost of industrial accidents should not fall on the injured alone, 
and there is probably no thinking man who does not recognize 
that, whatever the amount which may be contributed by the em- 
ployer for this purpose, it should reach the persons for whose 
benefit it is paid as directly as possible, and with the least reduc- 
tion for the cost of securing it. While no country has achieved 



LIABILITY AND COMPENSATION 451 

an ideal system for producing this result, that has been the under- 
lying idea of the old-world legislation on the subject. 

Our own legislatures have apparently taken a different view. 
During the whole period that this subject has been under world- 
wide consideration and until very recent years, it is the unfortun- 
ate fact that the legislatures of most of the American states have 
been over-subject to the influence of corporations, or rather of the 
capitalist and employing class, and this influence has made itself 
felt in the repeated suppression of employers' liability bills. 

New York State passed an Employers' Liability Act in 1902. 
New Jersey has never passed one.* 

Now, you are probably all conscious of the trend in this coun- 
try toward social legislation; I might almost say toward social- 
istic legislation. The Labor Unions have been growing in 
strength of recent years. Their representatives are numerous in 
the legislatures. Capital has been more or less under the ban and 
the pendulum is rapidly swinging. As it swings, the legislatures 
of many of our states are passing from a neglect of this subject to 
extreme and unreasonable activity in connection with it. The 
step from employers' liability laws to workmen's compensa- 
tion is a natural one, but it has generally been taken with care 
and deliberation, and, in the case of England, with intervals of 
years between the steps. Our legislatures are now approaching 
the subject with a feverish anxiety that is in marked contrast with 
their former apathy. Workmen's compensation laws and other 
laws designed to produce a similar result are being proposed and 
passed in a manner that is almost sure to work wrongs almost as 
great as the wrongs they are intended to right. 

We are, however, not as worthy of censure as the bald recita- 
tation of the facts would indicate. It is easy for a nation like 
England or France or Germany, whose laws affect all their citi- 
zens alike, to work out any problem and pass the necessary law. 
It is not easy in this country. No single state can afford to adopt 
a law which will have the effect of driving any industry to another 
state, and experience has shown how difficult it is for several dif- 



* Since this lecture was delivered, New Jersey has passed a comprehensive Em- 
ployers' Liability and Workmen's Compensation Act, 



452 LECTURE NOTES 

f erent states to agree on the same law. The Federal Government, 
as you all know, has no power to pass a law affecting the citizens 
or the industries of any particular state and, therefore, each state 
watches its neighbors and all its legislation is influenced by the 
question of the effect of a law upon its own industries. This 
partly accounts for the backwardness of even the important states 
of the Union in providing sound and humane laws on this sub- 
ject. It is not, however, a complete excuse. 

As an illustration of the difficulty which American states have 
in legislating on this subject, the State of New York passed last 
year a Workmen's Compensation Law, this being the first im- 
portant step in that direction taken by any state. Last Friday the 
Court of Appeals of that state declared the law unconstitutional 
and it is at least rather more than probable that when the question 
reaches the Supreme Court of the United States, as it probably 
will, the decision of the Court of Appeals of New York State will 
be upheld. 

Upon its face, this decision was a great blow to the prospect 
of securing reasonable workmen's compensation laws in this 
country. Singularly enough, however, it is doubtful whether 
labor leaders generally regret the decision and there is a curious 
side light on the whole subject in the fact that the class for whose 
benefit the law was designed were the least enthusiastic support- 
ers of it in New York State during the period that the law was 
in force, and there again we have an illustration of the difficulty in 
getting suitable legislation in this country. In England and Ger- 
many and all European countries, while the employer is held to a 
more rigid responsibility in the matter of care for his injured 
workmen, there is a rigid limitation of the amount which such 
workmen can recover from the employer and that is an essential 
feature of my reasonable workmen's compensation law. It was, 
indeed, a feature of the New York Law, but in this country the 
principle is repugnant to labor. The Labor Unions and their attor- 
neys feel that if an injured employee can recover at all, his recov- 
ery should be a large one. They feel that he should not suffer any 
portion of the loss, which he necessarily does under a law which 
gives him only fifty per cent of his lost wages. They insist that 



LIABILITY AND COMPENSATION 453 

he should have the whole of his lost wages, even though he was 
injured through his own carelessness. Indeed, I think that most 
of them go further than this and want a law that carries no limi- 
tations whatever on the amount of the recovery. They would 
prefer to leave this question as one to be decided by the trial jury. 
In other words, they would rather take a gambling chance of mak- 
ing an actual profit out of the circumstances of the injury than 
simply to be put in the possession of a sure but limited compensa- 
tion. In Indiana a law has just been passed which practically 
recognizes this demand of labor. It is not a compensation law, 
but is theoretically a liability law. It still leaves the subject of 
compensation as one to be tested by the theory of damages, but 
it strips the employer of nearly every defence which he can plead 
in his own behalf when his injured employee sues him. It throws 
the burden of proof upon him, which means in effect that he is to 
be held guilty unless he affirmatively proves his own innocence, 
and it provides no limitation in the event of disabling injuries, 
other than that the damages shall be commensurate with the in- 
juries sustained, which of course means that they may be any- 
thing that a jury chooses to give. 

I have explained these laws at considerable length because they 
are the means by which the employer is held to a financial ac- 
counting and you can readily judge from my statements of them 
that the cost to the employer is very great. What is more impor- 
tant to him is that it is growing very rapidly. An employer of 
small means may be financially crippled as the result of an acci- 
dent to his men. Even an employer on a large scale may have 
his year's profits seriously impaired by such a case. 

Twenty-five years ago in England, and at a somewhat later 
date in this country, employers of labor recognized that they must 
find some method to distribute this loss so that it would not be- 
come unduly great in single cases and thus arose the business of 
employers' liability insurance. You understand that the business 
of insurance of any kind is due to the necessity of spreading a 
loss which may happen to one man over a large number of men 
and thus reducing the cost of all such losses to a fixed sum which 
may be calculated in the estimates of the cost of manufacturing 



454 LECTURE NOTES 

any article or undertaking any given contract. It is through the 
medium of the insurance company that the employer accomplishes 
this result. And thus each employer pays the insurance company 
a small premium and the insurance company pays the large losses 
which fall upon a small per cent of their number. The insurance, 
however, except under the German system, is a mere incident. It 
is only a means by which the employer can prosecute his business 
with a fixed cost for meeting his liability and compensation losses. 
The principle of employers' liability and workmen's compensa- 
tion and the progress of legislation on those subjects would go 
on exactly the same if there were no insurance companies through 
whose medium the loss can be distributed, and the cost of doing 
business more accurately calculated. 

In the beginning, I told you I was particularly interested to 
talk on this subject to men who will shortly be concerned in the 
actual progress of industrial work and I think that the aspect of 
this matter which is the most important to you is that which will 
directly affect your own future work. It is needless to say that, 
if there were no accidents in industrial operations, there would be 
no need for employers' liability and workmen's compensation 
laws. There would be no cost to the employer and there would 
be no insurance companies to insure against the hazards of the 
business. Every writer on the subject admits the inevitableness 
of accidents in industrial operations. Most writers concede that 
these accidents may be greatly reduced. I am not sure that any 
of them go far enough in this direction and I commend to you 
in your studies the constant consideration of those mechanical 
appliances and of those systems which will tend to safeguard the 
lives of the workers. There has been an enormous development 
of what is known in a general way as safety appliances, of 
one kind and another. Some employers are disposed to ignore 
and to minimize the benefits of appliances or methods whose sole 
object is to reduce the number of accidents in any occupation. 
Some employers are not disposed to encourage engineers, super- 
intendents, and foremen to give careful and critical thought to 
methods that will save the men under them from injury, but I 
believe that the days of the brutal employer are passing and that 



LIABILITY AND COMPENSATION 455 

in the future much greater attention will be given to this subject 
than has been the case in the past. It is impossible in the time 
available, to refer to these matters so far as they are mechanically 
applied, but I cannot pass the subject without a brief reference to 
that side of it which is human. In my judgment, the men who 
can do more to prevent and avoid accidents in contracting opera- 
tions than any other class are the superintendents, engineers, and 
foremen. The superintendent in charge of a piece of work, whose 
chief ambition is to make a record of accomplishment in a given 
time or at a minimum of expense, may make a brilliant record, 
but he is running a very large chance of a ruined career and of 
a disturbed conscience if he carries his ambition for rapid per- 
formance to a point that leads him to disregard the reasonable 
rules of safety for his men. The cowardly, hesitating, and fool- 
ishly cautious policy in carrying on a piece of construction work 
is bad, of course, and it is very rare, but the bullying, slave-driv- 
ing superintendent who takes unreasonable chances is possibly, 
in the long run, the most unprofitable type of superintendent that 
his employer can have. 



'accidents to employees and liability 
therefor 

By 

Louis L. Babcock 

Within the past decade there has been a great improvement 
in the conditions which surround employees in this country. 

Many corporations are coming to recognize the fact that their 
workmen's efficiency is closely related to the welfare and happi- 
ness of not only the men, but their families as well. Many large 
plants now furnish instruction to their men respecting domestic 
economy and hygiene, and as a practical object lesson are build- 
ing up model villages, school and tenement houses, and hospitals. 
The United States Steel Corporation has been a leader in this 
movement. A few years ago the idea prevailed that when a man 
passed out through the plant gate the employer had no further 
interest in him. This view no longer obtains and up-to-date 
plants are spending their money freely to broaden and better the 
lives of their operatives and to furnish them with facilities to 
educate their children and to surround themselves with happy 
homes. The same thing is equally true within the plant itself. 
More attention is continually being given to safety devices and to 
rendering safer the work which is necessarily hazardous. 

Without going into the refinements of negligence law or at- 
tempting to state the almost revolutionary changes which statutes 
have made in the common law of the country within the last ten 
years, it is proposed to formulate some of the salient principles of 
law governing this important relation. 

At the outset it should be observed that the statutes of nearly 
all of our states forbid the employment of children under certain 
specified ages, and, in a measure, restrict the hours of employ- 
ment during minority after this age has been reached. The same 
scheme obtains in respect of women, who cannot be called upon 
to work beyond certain prescribed hours. For illustration: In 



ACCIDENTS AND LIABILITY A^7 

New York, no child under the age of fourteen years shall be 
employed in any factory, and no child between the ages of four- 
teen and sixteen shall be allowed to work without the production 
of an employment certificate issued by the health authorities of 
the locality, upon the parent's application; nor can minors under 
eighteen be employed after certain hours in various classes of 
work. 

Hence, employers of labor should lose no time in familiarizing 
themselves with these labor laws which can always be obtained 
upon application to the Commissioner of Labor of the state. All 
of these acts are based upon the theory that public policy forbids 
employing people of tender age or women, except as authorized 
by the statutes. In other words, the state enacts that the health 
and welfare of its citizens require that such unauthorized employ- 
ment must cease. Therefore, the courts have held in many cases, 
that when the employment of the servant is in violation of the 
statute and injury results during the employment, negligence of 
the employer is made out sufficient to justify sending the case to 
the jury; which, in most jurisdictions, is tantamount to a verdict 
for the plaintiff. 

In many cases it is quite difficult to enforce these laws because 
infants desirous of securing positions misrepresent their ages. 
In well-run plants, it is the custom to secure an affidavit from one 
of the parents as to the age of the child. 

In the larger plants an employment bureau is organized and a 
card index system kept with all the employees, by which is noted 
the record and qualifications of the employees and other impor- 
tant data. This bureau is charged with the duty of seeing to it 
that every person is legally employed. It would surprise many 
owners of plants to ascertain to what extent they are innocently 
violating the law and to what consequent liability they are con- 
stantly exposing themselves. 

One of the duties imposed upon employers is to furnish compe- 
tent employees in reasonably sufficient numbers to do the work in 
hand. This is a continuing duty. After the master has used 
reasonable care in selecting his servants, the presumption arises 
that their competency continues, but it is the master's duty to 



458 LECTURE NOTES 

exercise reasonable care in respect of them, for he is responsible 
for incompetency of which he has notice, either actual or con- 
structive. In other words, he is charged with the exercise of 
reasonable care in the way of supervision over his employees, and 
this duty runs during the term of the employment. A single act 
of incompetency does not establish general incompetency, but 
repeated acts may have that effect. In any event, where the 
incompetency is notorious and long continued, the master will be 
deemed to have notice irrespective of what may be his actual per- 
sonal knowledge. In well-systematized plants the employment 
cards show the previous history of the men ; and if they are prop- 
erly and accurately kept, they should show that reasonable care 
was taken in the selection of competent men. 

It should be noted in passing, that the modern tendency of im- 
posing heavy responsibility upon the employer for injuries to 
workmen, will have the effect of weeding out the young, the old 
and the physically incapable. The men who are not able-bodied 
will find it difficult to obtain employment, although they may be 
entirely competent to do the particular work for which they apply. 
This has been the effect of the Workmen's Compensation Act in 
England. Only time will tell whether this policy is suited to this 
country. It is certain that the policy of our great plants will be to 
limit the employment to the best men obtainable where the em- 
ployer is under so stringent a rule of liability as is now advocated. 

It is the master's duty to issue and promulgate rules governing 
the action of the servants in all undertakings which are complex 
or complicated; which rules, if faithfully observed, will reason- 
ably protect the servants. This principle does not apply to every 
simple and ordinary employment or detail of the business, but 
only to the general government of employees where the duties are 
so diverse and complicated as to require systematic cooperation 
in the common business. The rules should be made for such de- 
tails of the work as have proved necessary, practicable, and use- 
ful among capable business men. It is incumbent upon the em- 
ployees to observe these rules, and under the common law and 
most statutes regulating liability, if they disobey a proper rule 
and are injured, there can be no recovery. Proper practice re- 



ACCIDENTS AND LIABILITY 459 

quires these rules to be printed so that no misunderstanding can 
arise as to their meaning, force, and effect. Where employment 
bureaus exist, the man in charge issues to the employee when he 
enters the service a printed copy of the rules and takes a receipt 
therefor, which is thereupon filed with the man's record. The 
employee is charged with the duty of reading these rules and 
must observe them. Whenever men are employed who cannot 
read English, the rules must be interpreted to them and this fact 
is noted upon the man's card. In many plants where non-English 
speaking men are employed the book of rules is printed in one 
or more foreign tongues as required. The law exacts the same 
obligation with respect to every man employed and while the duty 
imposed is ofttimes onerous, it must be fulfilled. 

The master is also charged with the duty of instructing the ser- 
vant respecting any dangers not ordinarily incident to the busi- 
ness. In case minors or inexperienced persons are employed, 
the master is bound to instruct them respecting the dangers ordi- 
narily incident to the business. But the master's duty in this re- 
gard only extends to dangers which he knows about or should 
apprehend in the exercise of reasonable care. 

To summarize: 

The master should protect his servants from injury by the exer- 
cise of that degree of care which the reasonably prudent em- 
ployer of such labor exercises ; and should : 

1. Supervise his work and employees ; 

2. Furnish them with reasonably safe machinery, appli- 
ances, tools, and places to work; 

3. Give proper instructions as to the methods of work 
and the dangers incident to it; 

4. Furnish competent and sufficient employees; 

5. Issue and promulgate rules for the conduct and 
regulation of the work. 

The standard of care and diligence required is that degree of 
care exercised by a reasonably careful and prudent man engaged 
in the same business. The question of the liability of the master 
for an injury to his servant is tested by this rule : Did the master 



460 LECTURE NOTES 

conduct himself, under the circumstances, as a reasonably prudent 
and careful man engaged in the same business would under like 
circumstances ? 

The servant cannot recover if he has contributed to his injury 
by his own carelessness, although in many jurisdictions, even in 
the clearest cases, this has become a question of fact for a jury 
to decide and not one of law for the Court. The servant, in most 
jurisdictions, is still held to assume the risks incident to the em- 
ployment which arise after the master has performed the duty 
he owes to the servant, but this rule has been so modified by 
statute that the servant's assumption of risk is usually now passed 
upon by a jury as a question of fact; and juries almost always 
answer the question in the negative. 

The master cannot escape the duties he owes to his servants 
by delegating them to a superintendent or foreman. These duties 
are imposed upon and remain with the employer during the con- 
tract of hiring. It has always been the rule of the common law 
that a servant cannot recover for an injury occasioned solely by 
the negligence of a fellow servant. This principle has been 
largely modified by statute and the tendency of recent legislation 
has been to emasculate or do away with it entirely. 

This is necessarily a very brief sketch of the general nature of 
the relationship between the employer and employee. In the dis- 
charge of the reciprocal duties of this relation, both the master 
and the servant are held to reasonable care and prudence. In no 
branch of the law are such radical changes taking place through 
legislative action and judicial construction and rulings. It is in- 
cumbent upon employer to take every precaution to avoid injury 
to his men, not only on humanitarian grounds, but also from the 
more selfish standpoint of his own balance sheet. 

It is now proposed to state a few practical suggestions based 
upon a somewhat extended experience. 

In every plant there should be someone charged with the speci- 
fic duty of supervising the safety of the workmen. This person 
should be held responsible for the safety of the ways, works, and 
machinery, and the way the work is done, reporting direct to 
someone high in authority. He should make frequent inspections, 



ACCIDENTS AND LIABILITY 461 

for men are careless of their own safety and are continually tak- 
ing chances which are avoidable and unnecessary. This system 
is being rapidly adopted throughout the country by railroads and 
large plants. There is no reason why it should not be applied to 
every plant. One of our trunk line railroads recently appointed 
a committee to go over a division, to ascertain what could be done 
to improve its safety. The members of the committee were old 
employees and had been over this same division frequently for 
years. But being charged with the specific duty, in two days' time 
they found and reported numerous cases of structures too near 
the tracks and other grave dangers easily remedied. This is an 
illustration in point. The railroad has since made these inspec- 
tions a permanent duty and has detailed employees from the en- 
ginemen, trackmen, operatives, etc., to assist in them, so that 
every branch of the operating force may have representation on 
the committee. This practice will not only save and protect hu- 
man lives, but will surely engender a better spirit amongst the 
employees. It does not take much of a negligence case to cost 
$5,000 to the employer. Yet, for one half that sum every piece 
of dangerous machinery in the ordinary plant could be fenced; 
every set-screw counter-sunk; every walk around machinery 
fixed; every railing made permanently safe, and every live wire 
and track crossing properly safeguarded. In addition, a store- 
room could be provided containing proper material for scaffold- 
ing, chains, lamps, lanterns, ladders, and the various appliances 
used in repairs. How much money has been lost in our plants 
by neglecting these simple precautions ! More important still : 
How many men are dragging out a wretched existence to-day 
whose injuries have been caused by such neglect! 

This paper will have served its purpose if it is read by a single 
man who will spend the energy and small amount of money nec- 
essary to abolish these purely preventable dangers in his plant. 

It is not sufficient to promulgate rules. The rules must be 
rigorously enforced. The master must guard his men precisely 
as the commander of a regiment does, for men in the mass soon 
rely upon some superior authority to watch over them and protect 
them from themselves. A workman will appropriate any board 



462 LECTURE NOTES 

at hand to use in scaffold building without taking the time to 
procure the sound timber which the employer has provided for 
the purpose. A workman may have been familiar with the loca- 
tion of a set-screw on the collar of a shaft for years; but in a 
moment of forgetfulness will be dashed to death by getting en- 
tangled with it. He will oil machinery in motion when he could 
do so just as well while it was at rest. Illustrations might be mul- 
tiplied indefinitely. These facts must be recognized by employ- 
ers if we are to prevent the great loss of life and injury which 
now disgraces our industrial progress. 

Some years ago the writer prepared a code of rules for one of 
our large plants, which has been amended, from time to time, in 
the light of the operating experience and considerable litigation. 
Many of these rules relate to a specific situation and business, so 
it is proposed to quote simply the general rules which are more 
or less applicable to any plant. It is submitted that these rules, 
if obeyed, will afford reasonable protection to the operatives, 
provided special rules are formulated governing the business of 
the particular plant. They will be found at the end of this paper. 

It is obviously important that immediately after an accident has 
occurred steps should be taken to ascertain how it happened and 
to perpetuate the evidence, so that if a suit results or a report of 
it to the state is required, that the precise facts will be procurable. 

In the first place, there should be an iron clad rule in every shop 
that the situation should remain as it is until the person charged 
with investigation has reached the ground. Broken parts of 
machines and appliances should be carefully preserved, and it is 
usually advisable and easy to procure a photograph of the scene 
of the accident. All broken parts and appliances should he tagged 
for identification and safely stored. Broken pieces of iron should 
be so kept as not to gather rust ; and every precaution should be 
taken to be prepared to reproduce the situation in court as it 
actually existed, even after the lapse of years. There should be 
a camera in every plant and some operative trained in its use, if 
the plant has no regular photographer. All the witnesses should 
be immediately assembled and written statements taken, which 
the witnesses should sign and swear to. A statement should be 



ACCIDENTS AND LIABILITY 463 

taken of every eye witness and of every person who is in a posi- 
tion to give information regarding conditions that existed at the 
time of the accident, and every report should show clearly how 
the accident happened and the cause of it. The investigator 
should avoid reporting conclusions and should incorporate as 
much as possible of the investigation in the signed statements of 
witnesses, making a memorandum of the character and trust- 
worthiness of the witnesses and the time and place of interview. 

In all the armies of the world, soldiers are taught the elements 
of first aid to the injured, and the non-commissioned officers of 
the American Army are quite proficient in the art of rendering 
aid to the injured. Simple text books exist which the men may 
read and after a few lectures they are quite well qualified to ren- 
der aid to an injured person. These army men are probably in- 
ferior in intelligence to the generality of shop foremen and so by 
comparison there should be no insuperable difficulty in the way of 
having a few men in the plant equally well instructed. 

The members of the bar who make a specialty of procuring 
negligence cases, usually take the case upon a contingent fee 
which ranges from 20 to 50 or 60 per cent of the recovery, irre- 
spective of how simple the case is to try. In large cities, particu- 
larly, it is a common thing for an injured workman, who has a 
clear cause of action and who recovers a verdict of five thousand 
dollars ($5,000), to be obligated to his attorney to the extent of 
60 per cent of the recovery. That money, of course, is wasted. 
Whatever is paid should go to the injured person without any 
deduction. The man should receive good surgical treatment irre- 
spective of the question of settlement. Men respond, as a usual 
thing, to considerate and kind treatment and as a general thing 
there is little difficulty in promptly settling a case with a man for 
a reasonable sum provided the employer goes about it with tact 
and good judgment. 

In no event should a man who is settled with, be promised, as 
a portion of the settlement, that he shall be employed for any 
stated interval. Such agreements almost invariably operate badly, 
and if their existence forms a portion of the consideration upon 
which the man gives his release it operates to affect the legal va- 



464 LECTURE NOTES 

lidity of the release in case later on it is necessary to discharge the 
claimant. The signing of the release, in case a settlement is ef- 
fected, should be attended with considerable formality. It should 
be impressed upon the man that when he signs the release his 
cause of action is gone, and he should be told that the instrument 
that he is signing is not a mere receipt but a bar to any further 
claim on his part. The instrument should be under seal and the 
claimant should acknowledge its execution before a notary pub- 
lic, wherever that is possible. In the case of a foreigner, the re- 
lease should be carefully interpreted to the man and the inter- 
preter's affidavit appended, showing that this was done. Each 
plant should have a supply of printed releases, with the seals 
attached; and it has been found advantageous in many cases to 
have printed at the top of the release in prominent letters, the 
following words : ''This is a release and not a receipt for wages.'' 

In all cases it is well to have the claimant sign the release before 
witnesses, as well as to acknowledge it. In some cases, employers 
of labor have attempted to have the men sign a general release as 
one of the considerations for the contract of employment, with a 
view to pleading this release a bar in case of an injury. The 
courts have almost uniformly condemned this practice. 

In all cases at all serious, it will well repay the cost to retain a 
competent lawyer to make the necessary investigation and to 
negotiate the settlement, if one results. This is especially true if 
the workman is killed and the heirs have to be dealt with, for 
special rules apply to such settlements. 

This subject is too large to cover in a single lecture. It is one 
which, of late, has engrossed the thoughts of many of our ablest 
men. Politicians have found it a safe issue, for they can always 
improve their standing with labor by introducing drastic reform 
bills. The common law of negligence has been found unsuited 
to our present ideas and is gradually being superseded by statute. 
This result has been hastened by the fact that employers have not 
paid sufficient attention to the welfare of their men prior to an 
injury. It is no longer in accord with the spirit of the times, to 
await an injury before adopting protective devices. The writer 
asserts, in the light of considerable experience, involving hun- 



ACCIDENTS AND LIABILITY 465 

dreds of industrial accidents, that over 50 per cent of these acci- 
dents would never have occurred had the employer exercised the 
same skill to avoid them that he shows in manufacturing and dis- 
posing of the product of his plant. 

Appendix 
General Rules 

1. These rules are adopted and promulgated to insure the safety of 
employees of this Company. Their observance is hereby enjoined, and no 
one is authorized to change or amend the same or any part thereof in any 
respect, save by proper authority from the General Superintendent in writ- 
ing. 

2. Every employee must always have a copy of these rules at hand, and 
be conversant with every rule. He must render all the assistance in his 
power in carrying them out, and immediately report any violation of them 
to the head of his department, as hereinafter provided. 

3. The fact that any person enters or remains in the service of the 
Company will be considered as an assurance of willingness to obey its 
rules. No one will be excused for the violation of any of them, even 
though not included in those applicable to his department. 

4. All persons entering the service of this Company will be required to 
sign an acknowledgment that they have read, understand, and do agree 
to obey the rules and regulations of this Company. 

5. If in doubt as to the meaning of any rule or special instruction, ap- 
plication must be made at once to the proper authority for an explanation. 
Ignorance is no excuse for neglect of duty. 

6. The failure on the Company's part to enforce these rules, or any 
part thereof, shall not be deemed either an abrogation or an abandonment 
thereof. 

7. By continuing in the service of the Company, each employee assumes 
all risk arising from either an habitual or occasional violation of any rule 
of the Company, either herein contained or otherwise promulgated, unless 
he shall report such violation in writing to his immediate foreman, who 
in turn shall forward the said report to the Superintendent. 

8. A bulletin board will be found inside each gate. Other rules and 
regulations will from time to time be posted in duplicate on each of said 
bulletin boards. Each employee of the Company is hereby ordered to in- 
spect one of the said bulletin boards each day, and carefully read any no- 
tice, rule or regulation posted thereon. All amendments to these rules, if 
any there be, will be posted thereon, and when so posted shall be as ef- 
fective as though included herein. 



466 LECTURE NOTES 

9. Every employee is required to exercise the utmost caution to avoid 
injury to himself or to his fellows, and he is hereby warned that before 
exposing himself in working with or on the scaffolding, roofing, machin- 
ery, tools, equipment or appliances of this Company, he must examine for 
his own safety the condition of all scaffolding, roofing, machinery, tools, 
equipment or appliances or whatever he may undertake to work upon or 
with, before he makes use of or exposes himself on or with the same, so 
as to ascertain their condition and soundness. 

10. Vigilance and watchfulness insure safety. To avoid danger adopt 
the safe course. Employees must not trust to the care exercised by an- 
other when their own safety is involved. 

11. Every employee is required to report promptly, either to the Super- 
intendent or his foreman, or his immediate superior officer, any defect in 
any scaffolding, machinery, tools, equipment or appliances of the Company 
affecting the safety of anyone in using or operating upon or with the same. 
Repairs should be requested and made at once, if necessary to be made. 
Employees are forbidden to use unsafe planks, appliances, timbers, gearing, 
ropes or machinery of any kind or description. Employees must see for 
themselves that repairs so requested have been made before exposing 
themselves. 

12. A supply of sound ropes, gearing, cables, planks, appliances, tim- 
bers and tools of all kinds and sizes, are constantly kept on hand by the 
Company in the store houses. They may be had by application to the cus- 
todian thereof through the respective foremen. No excuse will be ac- 
cepted in case of accident arising from the use of unsound or damaged 
material of any kind. 

13. It is hereby made the duty and right of every employee to refuse 
to obey any order which imperils his life or limb. No person who is care- 
less of others or of himself will be continued in the service of the Com- 
pany. 

14. Every case of injury to person or property must be promptly re- 
ported in writing on the accident report blank provided for that purpose 
to the Chief of the Safety Department, stating the names and residences 
of all witnesses and all particulars of the occurrence. 

15. All employees will be regarded as in the line of promotion, advance- 
ment depending upon faithful discharge of their duty and capacity for 
increased responsibility. 

16. Every employee is required to keep the place of work subject to 
his control in neat and cleanly condition. Disorder and dirt will be taken 
to indicate laziness and incompetency. 

17. Employees are forbidden to leave their places of work to go to 
other parts of the plant during work hours, except on business of the Com- 
pany. 



ACCIDENTS AND LIABILITY A67 

18. Employees are forbidden to venture into dark places, whether near 
their place of work or not, without first obtaining a light to make their 
way safe. If employees violate this rule, they must assume all risk of 
injury. 

19. The Company has in store within the grounds and within conven- 
ient access large quantities of all the safety appliances required by these 
rules; lamps, lanterns, torches, gearing, ropes, cables, timbers, lumber of 
every description and the necessary materials to construct such structures 
as shall be necessary to do work with safety. In case any employee 
shall apply to the person in authority immediately over him for any of 
these articles for use in the prosecution of his work, and shall meet with 
a refusal, it is his duty and he is hereby ordered to refrain from exposing 
himself to danger and forewith report the matter to the General Superin- 
tendent or his assistant, and he is authorized to refrain from obeying the 
order of a foreman requiring him to expose himself to the risk of an acci- 
dent growing out of a failure to equip himself with the necessary appli- 
ances to do his work without risk. 

20. Employees must obey all general and special rules of this Company 
whether such rules are contained among the rules governing their particu- 
lar department or not. 

21. Every employee whose duties require him to work with or upon 
machinery, tools or appliances of any sort or description must carefully 
inspect and examine same, and report in writing to his foreman or super- 
ior officer any part or portion of such machinery, tools or appliances, which 
is not properly guarded or in proper condition and repair, and for failure 
to so report he will be held to assume all risks of accident therefrom. 

22. Every employee upon entering and while continuing in the service 
of this Company must familiarize himself with the dangers in or surround- 
ing his place of work, and avoid them so far as is possible; and every 
employee by entering upon or continuing in the service of this Company 
shall be presumed to have assumed all risks of his occupation or employ- 
ment. 

23. Employees are forbidden to approach or stand too near cables or 
ropes under tension or strain, in order to avoid the dangers resulting from 
the parting or breaking of such ropes or cables under such tension. 

24. Employees are forbidden to stand under hoists, cranes, conveyors, 
tackle, buckets or ladles while molten metals or weights are being carried, 
moved, raised or lowered. 

25. Employees are forbidden to walk upon or along the various rail- 
road or gantry tracks within the premises of this Company, and are for- 
bidden to cross tracks of any description without first looking and listen- 
ing, while in a place of safety for approaching cars, engines or other mov- 
able machinery. Never cross track where a full view in both directions 
cannot be secured. Always act on the assumption that near-by cars, en- 



468 LECTURE NOTES 

gines, machinery or structures on the track are apt to be suddenly moved, 
and avoid crossing at such places. 

26. Employees are warned that it is frequently impracticable for the 
men operating engines upon the Company's property to give warning of 
their approach. Always act on the assumption that engines or cars are 
in close proximity and see for yourself that the crossings are safe to pass 
over. 

27. Catching on engines or cars, crossing trains or other bodies in mo- 
tion, or riding on engines, cranes, cars or other moving bodies, except 
when so required by your duties, is forbidden as a highly dangerous prac- 
tice to life and limb. The company does not require it to be done, and 
positively forbids the practice. 

28. Employees are forbidden to remain upon or in close proximity to 
any track or runway used for the passage of engines, cars, cranes, larries, 
material conveyors of all kinds, or machines or machinery of any sort, 
where there is any danger of being struck, caught or injured in any man- 
ner by the same or by the appliances attached thereto or connected there- 
with or by material handled upon or by the same. All tracks, tramways, 
skids, chutes, passageways and runways for the operation, movement and 
passage of machinery, engines, cars, cranes, larries, conveyors or of mate- 
rial in any form or of any sort, are themselves places of danger and must 
be avoided by the employees of this Company. 

29. Whenever an employee is directed to work in close proximity to 
any track, tramway, skid, chute or runway used for the movement, opera- 
tion or passage of an engine, car, crane, larry, conveyor, machinery or ma- 
terial, he must keep in mind and look out for location and movements of 
same, and in all other ways take the utmost precaution to avoid being hit 
or run over by the said engines, cars, cranes, larries, and conveyors. Be- 
fore commencing work near any such track, tramway, skid, chute, runway 
or passageway, he must first notify the foreman of the mill, shop, yard 
or place where said engine, car, crane, larry or conveyor is located and 
must also notify the operator, engineer or machinist having physical con- 
trol over the movement and operation of each engine, car, crane, larry or 
conveyor from which injury is possible. He is forbidden to stand or work 
where the engine, car, crane, larry, conveyor or material if moved can in- 
jure him, and he must at all times watch out for his own safety and ob- 
serve the requirements of this rule notwithstanding the giving of such no- 
tice. 

30. Whenever any employee is directed to work in, upon or in close 
proximity to any machine or machinery, or within or in close proximity to 
any pipes, wires, bins, tanks, boilers, vats, furnaces, cellars, switches or 
switchboards, conveyors or other conductors or receptacles for the use of 
steam, gas, water, electricity, ore, coal, coke, fire, heat, molten metal, acids 
or materials of any sort, he must first, before commencing work at, in or 



ACCIDENTS AND LIABILITY 469 

near such place, notify both the foreman in charge and any employee en- 
trusted with the duty of regulating or controlling the flow, movement or 
passage of such steam, gas, water, electricity, ore, coal, coke, fire, heat, 
molten metal, acids or materials of any sort into, within, through or out 
of any such place. 

31. Employees are forbidden to set in motion any engine, car, crane, 
larry or conveyor, material or any machine or machinery without first as- 
suring themselves by personal investigation that there are no employees or 
other persons in or about such engine, car, crane, larry, conveyor, material, 
machine or machinery, or upon or in close proximity to any track, tram- 
way skid, chute or runway used for the passage of same, whose safety is 
endangered by so doing, and any employee disregarding this rule will be 
subject to discharge from the service of this Company. 

32. Employees are forbidden to turn on gas, steam, water, electricity, 
fire, heat, molten metal, acids or any other dangerous substance, without 
first assuring themselves by personal investigation that there are no em- 
ployees or other persons within, in contact with or in dangerous proxim- 
ity to the pipes, wires, tanks, boilers, vats, furnaces, cellars, switches or 
switchboards, conveyors or other conductors or receptacles, whose safety 
is endangered by so doing, and any employee disregarding this rule will 
be subject to discharge from the service of this Company. 

ZZ. A blue flag by day and a blue lantern by night must be placed on 
any engine, car, crane, larry, conveyor or other machinery by the employee 
who is directed to or whose duty requires him to repair or work upon 
same, or in a position where he would be exposed to injury by the move- 
ment of the same, from any cause whatsoever. A blue signal denotes that 
workmen are at work upon, under or about said engine, car, crane, larry, 
conveyor or other machinery, and employees are forbidden to move or 
attempt to couple onto or to bring anything in contact with the same until 
said blue signal has been removed by the employee who placed it. When- 
ever an engine, car, crane, larry, conveyor or other machinery is protected 
by a blue signal, other cars, cranes or obstructions must not be placed in 
front of it, so that the blue signal will be obscured. 

34. Employees are warned of the dangers incident to all blasting 
operations and to the use of explosives for excavating purposes, and are 
forbidden to remain in the vicinity where such work is being performed. 

35. Employees are hereby warned that molten metal when brought in 
contact with water or cold or damp ground or other surfaces, will re- 
sult in explosion, and are forbidden to permit or make such contact pos- 
sible under any circumstances. 

36. Employees are warned of the constant danger existing at or in the 
vicinity of blast furnaces, blast stoves, ore bins, ore beds, unloaders, con- 
veyors and all other blast furnace equipment, resulting from the fre- 
quency of gas explosions, escaping gases and break-outs of molten metal 



470 LECTURE NOTES 

from the furnaces, slips of furnace stock causing explosions, and dis- 
charge of same from the furnaces, sliding and caving in of ore piles, drop- 
ping of ore or other material from overhead buckets and carriers. Em- 
ployees are accordingly forbidden to go on top of or remain at or in the 
vicinity of blast furnaces or other blast furnace equipment above men- 
tioned, unless the duties of their employment require their presence in such 
places, in which event they are forbidden to remain there longer than is 
actually required to perform their work. 

Z7. Employees are forbidden to take short cuts over dangerous places, 
or to use temporary paths, planks or walks where any other path or pas- 
sageway is available, which is known to be safe, even though such other 
path or passageway is longer or less direct. 

38. Employees are forbidden to remove or disturb any covering or 
guard placed over any sprocket, gears, clogs, wheels, set-screws or other 
dangerous parts of machinery or unsafe places, except for purpose of 
oiling or repairing machinery, and anyone violating this rule will be dis- 
missed from the service of this Company. 

39. Employees are forbidden to go aboard boats at the Company's 
docks, except when their duties require them to do so. 

40. Employees are forbidden to rest upon or lean against any railings 
or guards built upon or alongside of dangerous places or machinery. 

41. Employees are forbidden to stand or pass close to cars which are 
being loaded at the pig iron machines, or any places where chipping work 
is being performed, in order to avoid danger from flying pieces or 
particles of metal or other materials where such work is being done. 

42. To avoid accidents employees- are required to use steel cable or wire 
rope instead of hemp rope for slings supporting pulleys, block and tackle 
and all other hoisting apparatus. 

43. In using all hoisting apparatus, employees are forbidden to make a 
hoist before the load is securely made fast and properly balanced to insure 
safety. 

44. Employees engaged in dumping ladles of molten metal, dust, or cin- 
ders must use care not to stand in the way of any metal or cinder which 
might splash or run out of the course in which it is intended to flow, and 
must first see that it will not run in the direction of the point where they 
are standing. 

45. Employees are warned against crossing over conveying tables or 
runways while mills are running. They are liable to be struck by the hot 
bars which are being rolled. 

46. Employees are forbidden to light furnaces, except with a wood fire. 
They must not turn on gas until a good wood fire is burning. 

47. Employees are forbidden to use a pole or stake in moving engines, 
cars, cranes or other conveyors located on adjoining tracks. 

48. Employees are forbidden to place set-screws in shafts, collars or 



ACCIDENTS AND LIABILITY 471 

other movable machinery, allowing head of screw to project out any dis- 
tance without proper protection of the projecting screw head. No excuse 
will be accepted from anyone leaving set-screws projecting and unpro- 
tected, and anyone doing so will be immediately discharged. 

The foregoing rules are of general application. The special departments 
should be governed by rules applicable to them. The following rules are 
given as illustrations : 

Electrical Department 

1. Employees are forbidden to go upon or to remain upon any over- 
head crane, hoist or other overhead appliance, for any purpose whatso- 
ever, without first giving notice to the foreman in charge of such crane, 
hoist or other appliance of his intended presence there. 

2. A red flag has been supplied for the cage of each crane, which must 
be conspicuously displayed in the socket hole provided for that purpose 
whenever the crane operator leaves his post to work around or in prox- 
imity to said crane for any purpose. Such flag shall be a notice and warn- 
ing to all persons that the crane must not be moved. 

3. Employees are warned not to come in contact with switches, control- 
lers or fuseblocks in such manner as to produce a short circuit through 
themselves, and must assume all risks of injury resulting from disobedi- 
ence of this rule. 

4. Linemen are forbidden to work on poles or other high places with- 
out the use of safety belts. 

5. Before working on any electrical apparatus or close to any wires, 
cables or other conductors of electricity, employees must first make sure 
that all such apparatus, wires, etc., are properly insulated. 

Foundry Work 

1. Employees are forbidden to place water, snow or ice in any ladle, 
pot or other receptacle intended for the use of molten metal, or to allow 
moisture in any form to accumulate therein, and are forbidden to jostle 
fellow-employees while carrying or working with molten metal; and em- 
ployees are further forbidden to pour or spill molten metal upon any cold, 
damp or rusty surface and must assume the consequences of all explo- 
sions resulting from the violation of this rule. 

2. Employees are forbidden to wear laced or buttoned shoes while en- 
gaged in or about the foundry, but must provide themselves with shoes 
that can be easily removed in case of emergency to prevent burning by 
molten metal. 



472 LECTURE NOTES 

Construction and Excavation Work 

1. In case it becomes necessary to excavate or pile material, earth or 
other substances near a passageway, employees must see that they are 
protected by lights and barriers at night and barriers all day, so that no 
one may fall into, against or over same. 

2. Employees are required to use great precaution in excavating, shov- 
eling, picking or digging in all places where dynamite or other explosives 
have been used for blasting purposes, and avoid striking with their tools 
or appliances unexploded charges or portions thereof. They must care- 
fully examine and inspect all such places before and while continuing work 
at or near the same, and by their failure to observe this rule shall be pre- 
sumed to have assumed the risks resulting from striking and exploding 
such charges. 

3. Employees are instructed and warned to remain at a safe distance 
for a reasonable length of time after an attempt to blast has been made 
before returning to such places or its immediate vicinity, and by their fail- 
ure to observe this rule shall be presumed to have assumed all risks from 
subsequent or delayed explosions. 

4. All excavations must be shored up to protect those working therein, 
and each man must see for himself that this rule has been complied with. 

Scaffolds and Scaffolding 

1. The Company has on hand for use at all times a sufficient quantity 
of new and sound ropes, slings, timber and scaffolding appliances of every 
description, proper and fit for use. 

2. Every employee before going upon any scaffold of any description, 
must see for himself that the scaffold and its supports are properly built 
and erected of good and sound material and properly secured to its sup- 
ports, or if a hanging scaffold, to the structure against which it is sus- 
pended. Sufficient time will be at all times allotted to each employee to 
make this examination. He is forbidden to enter upon any scaffold of 
any description until he has satisfied himself by such personal examination 
that it is safe to support four times the weight which the prosecution of 
the work at hand requires. Employees are forbidden to trust anyone else 
to see that such scaffolding is safe and sound. Every employee who goes 
upon a scaffold without first carefully inspecting it and seeing that it is 
safe or made safe will be discharged. 

3. Upon entering upon the scaffold employees are notified that they 
waive any provisions of law enacted for their protection in the event the 
scaffold fails in any respect, causing injury. Employees must not trust to 
the care exercised by another when their own safety is involved. 



GATHERING ENGINEERING COST DATA* 

By 

Halbert p. Gillette 

I purpose offering a few suggestions on the methods of secur- 
ing and using cost data. I need not dwell long upon the use of 
such data ; the difficulty consists in the finding of the data rather 
than in the application of them when found. 

The dearth of information bearing upon the actual cost of 
doing work will soon become apparent to many of you, if my own 
early experience in any degree typifies that of the average engi- 
neering graduate. I recall with distinctness the day when a 
farmer entered my office and asked for "the surveyor." Being 
informed that I was "the surveyor," his next question was, "What 
will you charge to subdivide a section of land for me?" I put 
the question to you, gentlemen — What would you charge to sub- 
divide a section of land? You are doubtless quite as capable of 
answering now as I was then. After some "sparring," in which 
I asked the location of the land, the density of brush, and the 
like, I made a guess, naming $20 as the fee for the work. I re- 
membered afterward that my farmer friend closed the bargain 
with alacrity. I, with my party (of one man), spent just six 
days chopping brush, not to mention two days finding lost cor- 
ners, so that when the center of the section had been located, I 
turned over the $20 to my party for wages, and, as for myself, I 
had left the cost data. Few of you are likely to have just such an 
experience, but many of you will have experiences not so greatly 
dissimilar. 

The lawyer and the doctor are not expected to submit their 
bills until their work is done. The engineer, however, because 
he is a master of exact science, is presumed to be gifted with 
exact foresight even as to bills for his own services. So you need 
not be surprised if some prospective client, who contemplates 



*Abstracted from a lecture delivered before the civil and mining engineering stu- 
dents of Columbia University, November 24, 1903, and printed by permission of the 
Editors of the School of Mines Quarterly and the Author. 



474 LECTURE NOTES 

building a trolley line, asks you what the survey will cost, and 
takes out his note-book to record the reply before you can catch 
your breath. 

Fortunately, there is a good deal in print relative to the cost of 
different kinds of surveying, but unfortunately, and strangely 
enough, these surveying cost data are not ordinarily to be found 
where you would most expect to find them, namely, in text-books 
on surveying. In view of this condition of affairs, I advise you to 
record in a note-book every bit of information that you can secure 
relative to the cost of surveying ; and I would go farther in advis- 
ing you to record the time that you yourselves take to do the 
various pieces of field work at the summer schools of surveying. 
This you should do not so much for the few cost data that you will 
obtain while making these practice surveys, but for the habit 
that you will thus form — the habit of observing and recording the 
time consumed in doing work. Let me pause here to say that for 
the formation of a habit that has been invaluable to me, I am 
indebted to Professor Monroe; for, as a part of our summer 
school of mining work, we were required to record in note-books 
not only the methods of drilling, and the like, but the progress 
made — the cost of doing the work. The data that I thus gathered 
were not without value, but the habit that I thus formed has been 
to me invaluable. 

Shortly after my first experience in the art of cost guessing I 
was called upon to locate a number of wagon roads through a new 
country, hilly and covered with dense forest. Having finished the 
survey and computation of quantities for a gravel and plank road 
some eight miles long, I submitted my plans and estimate of 
quantities. I was requested to submit also an estimate of the cost 
of each item of work. "What will it cost?" — the same old ques- 
tion again ! Going to my office, I turned instinctively to the book 
that I had always supposed contained all that was known about 
the cost of engineering work. The first item that I had to con- 
sider was earth excavation, and I felt that on this item I should 
not be disappointed in putting my trust in the book. I found that, 
for the short haul in the road work under consideration, drag 
scrapers would be most economic ; and, if my memory serves me 



GATHERING ENGINEERING COST DATA 475 

right, I learned that about five cents per cubic yard would cover 
the cost of my road excavation. But when I stopped to consider 
it, that seemed a very low unit cost, and I recalled vaguely hav- 
ing seen contract prices for road work that were much higher. 
However, I reasoned that the conditions governing my work prob- 
ably differed from those governing other work, and surely I could 
not err very badly in accepting the data furnished by my book. 
Fortunately, my mind was not wholly at ease in spite of the book's 
elaborate tables of earth-work cost, and I finally resolved to find 
some local contractor and put the question to him as to what he 
would consider a fair price for earth excavation under the given 
conditions. I found my man, a Mr. Murphy I believe his name 
was. Mr. Murphy, after hearing my question, did not turn to his 
book, as I half hoped, half expected he would, but without hesi- 
tation gave some twenty odd cents per yard as being a fair price 
for the work. In spite of the fact that he seemed very sure about 
it, I ventured to remark that Murphy and my book did not agree 
very closely. I was told in a few forceful terms that tables of 
earth-work cost had been ''the ruination of" more contractors 
than Mr. Murphy had fingers and toes. I was informed that a 
book was "very good for the theory," but worse than useless for 
*'the practice." 

I may say here that, for fear of betraying your ignorance of 
costs, you need never hesitate to go to a contractor for informa- 
tion. I find that contractors, as a class, think that engineers, as a 
class, know next to nothing about the actual cost of work, and I 
fear that there has been altogether too much reason back of this 
belief. An older man is always flattered by having a younger 
man come to him for advice or for information, and contractors 
are no exception to this rule. 

There is, however, another side to the reliability of this source 
of information. Contractors often err exceedingly in their esti- 
mates; and an experienced contractor is more likely to err than 
an experienced engineer where the work is new to both, the rea- 
son being that the engineer, by virtue of his mathematical train- 
ing, is more likely to "figure out" every item rather than to "lump 
off" the unknown in one bold guess. 



476 LECTURE NOTES 

Reverting to my estimate, or perhaps I should more truly say 
to Mr. Murphy's estimate, of the road work, I was taught by it a 
very useful lesson, and incidentally the habit of keeping records 
of the cost of work coming under my observation was strength- 
ened by this experience. I have since found that records gath- 
ered thus at someone else's expense are not the least valuable of 
an engineer's stock in trade. 

There will come a time when some of you will be ''out of a job" 
(at least that has been one of the experiences of a few of us who 
are older in the profession), but even then you may usually spend 
your time to good advantage if you are near the site of construc- 
tion work. Let us assume, for example, that Fifth Avenue is being 
paved with asphalt, and that you have a little time at your dis- 
posal each day. In the morning you visit the work, count the 
men engaged, and observe their respective duties, all of which you 
enter on a scrap of paper to be afterwards copied into your 
permanent note-book. You talk with the foreman and learn 
from him what the average progress of the work has been, but 
under no circumstances do you rely entirely upon what he tells 
you. You note that the pavement has reached a point opposite No. 
531, at a given hour, and then you go away to study some other 
work in the same way. Later in the day, or the day following, 
you return and pace the distance progressed since your previous 
visit when the end of the pavement was opposite No. 531. Thus 
you find out whether or not the foreman was somewhat of a liar, 
as occasionally happens. But the foremen are not necessarily 
liars even when they deceive you, for it often happens that they 
themselves do not know the average rate of progress. Foremen 
on pavement work usually do know what a fair day's work is, but 
on work less easily measured, they frequently do not. You may 
now watch the gang laying the concrete pavement base for an 
hour, counting the batches and estimating the yardage ; and upon 
comparing this short-time observation with your record for the 
full day, you may learn something else — something about human 
nature. Should the output of the laborers for the hour's work ex- 
ceed the rate for the full day by 50 per cent, or even 100 per cent, 
do not regard the short-time observations as valueless. Look 



GATHERING ENGINEERING COST DATA 477 

about. The contractor himself may be standing near by. The 
presence of the man who pays the men out of his own pocket 
often has a magic effect. Where laborers were averaging 12 cu- 
bic yards per day loaded with shovels, and where they were appar- 
ently working well, I have seen the output jump to 18 cubic yards 
and maintained day in and day out at that rate, simply because of 
a change in management. 

Let me digress here to say a word about foremen. When a 
foreman comes to you seeking a position and mentions as one of 
his qualifications the fact that he is always popular with laborers, 
and that as a consequence they will do more work for him than 
for other men — don't take any stock in that foreman. Men, as 
they are now constituted, do not work for the pleasure of pleasing 
a foreman. The ''jollier" is good enough in his place, but his 
place is not as foreman of a gang of laborers. The same severity 
of discipline should be maintained as in the army. The foremen, 
who are in reality the officers, should keep aloof from the laborers 
socially, and should hold the men strictly to their tasks with little 
or no show of leniency. If you will choose extremes, choose the 
swearing foreman in preference to the ''jollying" foreman. Ad- 
vice of this kind sounds harsh, and so it is, but work is a harsh 
task for most of us in this world, and it takes harsh measures, 
often harsh language, to hold us to our duty. 

I shall speak next of an experience in estimating the cost of 
bridge building. I designed two highway bridges of a modified 
Howe truss type, and, forming a partnership with an experienced 
bridge foreman, went about securing a contract. Of course it was 
not difficult to estimate the cost of the timber and steel delivered 
at the sites, but when my partner and I put our heads together in 
an endeavor to agree upon an estimate of the probable cost of the 
labor of framing and erecting the bridges, our heads did not bump. 
Indeed we were about "100 per cent apart," as someone put it. 
My partner guessed that $500 would cover the labor item on one 
bridge — a bridge with a 16-foot roadway, 160 foot span, designed 
to carry 100 pounds per square foot. I had all the books on 
bridge design and construction, but diligent search had failed to 
disclose a single scrap of information that would guide me in esti- 



478 LECTURE NOTES 

mating the cost of building a Howe truss bridge, or, in fact, a 
wooden bridge of any sort. I turned to the files of the only 
engineering journal available, and finally I found just one little 
half-column article giving some costs for a Howe truss railway 
bridge reinforced with the wooden arches that were common in 
the early days of bridge building in this country. From the data 
there given, I estimated the labor on one of my bridges at $1,000 
or 100 per cent more than my partner's guess. We "split the 
difference" (a process not infrequently used by engineers and 
contractors) and we bid accordingly. The first bridge erected by 
us cost almost exactly $500 for labor plus $500 for materials. I 
think this is as good a record for economic bridge construction as 
is likely to be found. I feel safe in making the assertion, for, 
although that bridge was built eight years ago, I have yet to find 
any published record of the cost of Howe truss bridge building 
other than the one that I mentioned a few moments ago. I shall 
not now give the itemized cost of this work, for my present pur- 
pose is not to give you data so much as to indicate how scarce 
data are and how desirable it is to form the habit of gathering and 
analyzing them. 

Our next bridge went the way of many a good bridge over 
many a turbulent Western river. A freshet undermined the false- 
work, and let the bridge drop the day before its expected com- 
pletion. When we had fished what was left of our bridge out of 
the water, when we had put it up again, and when we had settled 
the hospital bills (by a miracle there were no deaths) my original 
$1,000 estimate was exceeded. I learned by this accident two 
things : ( 1 ) Never to omit an allowance for accidents and other 
unforeseen contingencies ; (2) never to neglect to insure the work- 
men. I shall digress to say a word about insuring laborers. Up 
to that time, I had supposed that if laborers were to be insured, 
it could of course be done by taking out a separate accident policy 
for each man — quite an expensive procedure as you doubtless 
know. After the accident I learned upon looking into the matter 
that a blanket policy covering all the men can be taken out, and 
that the premium is a given percentage of the pay roll ; thus on 
earth-work you may insure all your men for less than one per cent 



GATHERING ENGINEERING COST DATA 479 

of the pay roll. This insurance does not give to each man a 
weekly stipend in case of accident, or to his heirs a designated 
sum in case of death. What the insurance company does do is to 
protect the contractor by assuming all liabilities from claims made 
by injured workmen or their heirs. The insurance company 
limits its liability, however, so that in case a number of men are 
killed by one accident, the contractor may have to stand part of 
the damages. No matter how safe the work seems to be, a con- 
tractor should never neglect to take out a pay roll insurance 
policy. Many a contractor, just starting in business, has been 
ruined through failure to insure against accident. 

Taking up again the subject of cost gathering, I would impress 
upon you that you should not wait until you are in responsible 
charge of work before you begin gathering cost statistics. 
Many of you will find yourselves before long in the position of 
inspector on some engineering work of magnitude, and the very 
magnitude of the work will probably discourage you in your de- 
termination to learn something about costs by your own observa- 
tion. Let me assure you that you need not be in the least discour- 
aged, that in fact you will probably be in a better position to ac- 
quire the most valuable kind of data than is the chief engineer 
himself. He, to be sure, will learn in a general way what each of 
the classes of work costs ; but you, if you avail yourself of your 
opportunity, will learn in detail what certain parts of the work 
cost. I would sooner know every detail of the cost of a given 
kind of work on the New York subway, for example, than to 
know in a general way what all the items cost, and let me ex- 
plain to you why. Suppose that you determine to learn the cost 
of rock excavation where cableways are used to handle the ex- 
cavated rock. You start by studying the cost of handling the 
rock with the cableway, and with your watch in hand, you note 
that at 9 : 15 : 10 (reading the hour, the minute and the second 
hand) the bucket begins to rise from the pit ; at 9 : 15 : 20 it is out 
of the pit and begins its travel along the cable ; at 9 : 15 : 40 it has 
reached the dump ; at 9:15:55 it has dumped ; and so on until it 
has made the round trip. Thus you time in detail a large number 
of round trips until you have a fair average for each element. 



480 LECTURE NOTES 

You measure the lift and the distance of travel, and you note the 
kind and size of engine used ; and when the plant is shifted from 
one place to the next you ascertain the lost time and the cost of 
shifting. What, you may ask, is the use of going so minutely into 
details ? The answer is simply this, that you may be able to pre- 
dict the cost of future work where some of the details differ, as 
for example the lift, or the length of the haul, or the number of 
times the plant must be shifted for a given yardage of excavation. 
Without such detailed data you will be unable to predict accu- 
rately but will have to guess. It is just this kind of detailed infor- 
mation that the chief engineer very likely will not get, so that, in 
fact, with all his seeming advantage he may not be able to predict 
the cost of similar work, where conditions vary somewhat, with 
as great accuracy as you can. Indeed, I venture to say that on 
one job, thoroughly studied in detail, it is possible for a young 
engineer to learn more about actual costs than the majority of 
engineers learn in a lifetime. 

Let me cite an example to emphasize the importance of a de- 
tailed knowledge of rock excavation. An engineer, a man of 
middle age who had seen a great deal of construction work, deter- 
mined to bid upon one of the sections of the Erie Canal deepening 
work in 1896. He secured a contract at prices almost the same as 
those that had prevailed on the Chicago Main Drainage Canal, 
that is, 75 cents a cubic yard for rock excavation and 28 cents for 
earth. To this engineer all canals evidently "looked alike." 
Canals, to him, were canals, and rock was rock ; he gave no heed 
to the fact that on the Chicago Canal the rock was taken out in 
three benches, each twelve feet thick, whereas in the Erie Canal 
deepening one bench only two feet thick had to be removed. To 
this day I cannot account for that engineer's failure to make at 
least some allowance for the difference in conditions, but he did 
not, bidding for the rock about half the price received by other 
contractors. Of course, when he began to do the work and found 
how much of the time his cableways were idle during the frequent 
shifting necessitated by the shallow cut, when he found what an 
amount of drilling per cubic yard is necessary where the face is 
only two feet, and when he found that he had a great quantity of 



GATHERING ENGINEERING COST DATA 481 

snow and water to handle for a few cubic yards of excavation, he 
learned that there is something besides words and names and bid- 
ding prices to be known by the contractor who would escape 
failure. 

I am led by the foregoing example to add something concern- 
ing the use of bidding prices as a guide in estimating the cost of 
work. I think I may safely say that 90 per cent of the engineers 
in practice base their estimates upon contractor's bids on a similar 
work. Where the rates of wages, the prices of materials and all 
the conditions governing the work are practically alike, this prac- 
tice is a safe one ; still I think that the practice is accountable for 
many of the failures of engineers who have attempted to go into 
the business of contracting. It is, on the whole, a practice not to 
be encouraged; but as we must all fall back upon it at times, I 
shall point out a few pitfalls to be avoided. Contractors very fre- 
quently unbalance their bids ; by this is meant that they bid an un- 
reasonably high price on one or more items and offset it by bidding 
unreasonably low on one or more of the remaining items. To 
illustrate, suppose 20 cents per cubic yard is a fair price for earth 
excavation and that $1.50 is a fair price for rock excavation, then 
we might have a balanced bid like this : 

10,000 cu. yds. earth at 20 cts., $2,000 

200 cu. yds. rock at $1.50, 300 



Total, $2,300 

Now suppose the contractor decides for one reason or another to 
unbalance his bid, and bids thus : 

10,000 cu. yds. at 17 cts., $1,700 

200 cu. yds. at $3, 600 



Total, $2,300 

You will observe that his total bid is unchanged; yet in case it 
happens that far more than 200 cubic yards of rock is encoun- 
tered, he stands a chance of making a large and unjust profit by 
virtue of his lack of virtue, and because of his gift of fore- 
sight or shrewdness. There are many reasons for unbalancing 



482 LECTURE NOTES 

bids, and some of them betoken no dishonesty at all ; thus a con- 
tractor may wish not to disclose to his competitors what he re- 
gards as a fair price for a certain item, because he may intend 
bidding at any other time when that item will be the most impor- 
tant on the bidding sheet. I have known a few instances where 
dishonest contractors have unbalanced their bids, bidding high 
on the items of work they intend to perform first. Then, after 
skimming the cream, they have skipped out for South America, 
leaving their bondsmen or others to finish the work at a loss. 
This, however, is a very rare procedure nowadays. 

You will see the necessity of having a record of contract prices 
not on one but on a number of different contracts, so that you may 
strike a fair average. I have found that the most convenient way 
of recording bids is to copy them from the lists given in the engi- 
neering journals, using an indexed note-book. Under "Earth" I 
enter bids (high, low and average) for a few of the reservoirs let 
each year in different parts of the United States ; I likewise record 
bids for sewer trenching, for railway earth-work, for road earth- 
work, etc. And in this way, I keep also an up to date record of 
prices on concrete, masonry, piling, rock excavation, tunnels, etc. 
A section headed miscellaneous is one that I oftenest consult. 
There I enter the prices for sodding, clearing and grubbing, fenc- 
ing, etc. You will have more luck than I have had if you find any 
printed information as to the actual cost of sodding, for example, 
and the same may be said of many another item. Contract prices 
are in such cases your only guide, and by all odds better than a 
guess ; but if you were to trust to your memory or to an index to 
find them when you needed them, you would find your memory of 
little service and the ordinary indexes scarcely better. 

I keep three sets of cost data note-books. In one book, as I 
have just said, I enter contract prices ; in another, I enter abstracts 
of actual cost of work given in published articles ; and in the third 
book, I enter my own observations. I have done this now for 
some ten or more years, and I have never regretted the labor so 
spent. After all it takes but a small fraction of a day to keep the 
records up, when a system has once been worked out. Up to the 
present, there has been comparatively little published on the 



GATHERING ENGINEERING COST DATA 483 

actual cost of engineering structures all told; and it is a curious 
fact that most of that which has been published relates to unusual 
or to difficult work. Thus I could refer you to a score of articles 
on the methods and cost of laying subaqueous water pipe for 
every single article on ordinary water pipe laying on land. I 
could give you references to forty different articles on the cost of 
tunnelling in rock, as published in one engineering journal, while 
during the same period of time that journal has not published one 
comprehensive article on open cut rock excavation or railroad 
work, and only one on rock trenching. 

As to using cost data I need say but little. In making an esti- 
mate be liberal. Contingencies are almost certain to arise that 
you have not definitely foreseen. Storms, strikes, delays in getting 
materials, errors of judgment as to materials to be encountered, or 
some others of a hundred and one things may act to increase the 
cost of the work. Therefore, I say, be liberal in your estimates. 
To add 5 or 10 or 15 per cent for profit is seldom enough where 
much labor is involved ; generally 20 or 25 per cent makes a fair 
allowance for profits. One often hears it said that an over-esti- 
mate indicates as much ignorance as an under-estimate. Possibly 
it does, but I shall always prefer to be on the "over-estimate" side. 
I have yet to hear a man complain because he had been 
called upon to pay less than he had expected to pay ; but I do re- 
call some very loud protests where the final bill exceeded the 
original estimate. So it is with companies, and with the public. 
They are more apt to regard the difiference between your estimate 
and the actual cost as so much saved by your ability, rather than 
as so much erred in your estimate. 

In closing, I would say that had this lecture been a written one 
I should have gained in conciseness, and I should have been 
enabled to present a larger number of facts ; but after all, in an 
hour's time I could have given only a few data and they would 
have been so dry as to be speedily forgotten. My principal object 
has been not to furnish you with data, but to assist you in forming 
the habit of collecting and analyzing cost data for yourselves. 
Perhaps a rather informal talk, illustrated with some personal 
examples, may have been more effective in attaining this end than 



484 LECTURE NOTES 

a more formal lecture would have been in driving home the fact 
— that it pays to observe, to record, and to analyze costs ; whether 
you are in civil or in mining engineering, as employees, or are 
yourselves employers. 



TASK AND BONUS IN MANAGEMENT 

By 

H. L. Gantt 

Last year I had the pleasure of talking to the Senior class on 
the general subject of Task and Bonus in Management, and gave 
them some general illustrations. This time I am going to de- 
scribe in detail the results in a simple case. In taking a simple 
case, however, I wish it to be understood that my object is to ex- 
plain our methods in their simplest forms. The same methods 
have been repeatedly applied with practically the same measure 
of success to a great variety of work, and the writer has not yet 
encountered any work whatever which has not been benefited by 
their application. 

In a few words, our method is this : Study your problem thor- 
oughly, and, having decided on a course of action, make it to the 
interest of all your intelligent and capable workers to cooperate 
with you. 

Performing a Task. 

People as a rule prefer to work at the speed and in the manner 
to which they have been accustomed, but are usually willing to 
work at any reasonable speed and in any reasonable manner, 
provided there is a sufficient inducement offered them for so 
doing, and they are so trained as to be able to earn the reward. 

In our system of management, we determine the amount of 
work a good man, fitted for the work, should do, and set that as 
the minimum acceptable task, paying for its accomplishment a 
substantial bonus in addition to his day's pay. We try to find, if 
possible, men who are already skilled in the work, and who can 
perform the task. It frequently happens, however, that the num- 
ber of such men is insufficient for our purpose, and it takes time 
to train the unskilled to a proper degree of efficiency ; but with a 
bonus as an incentive, and a proper instructor, a very fair propor- 



LECTURE NOTES 



tion of the unskilled finally succeed in performing a task that was 
at first entirely beyond them. 

In selecting men to train for a job, care must be exercised to 
select only such as are physically fitted for the work, and who 
have ambition and energy. When an unskilled workman has been 
trained to do one job well, he will learn the next better job much 
more readily than he did the first, and after a time will feel that 
he is not necessarily and hopelessly in the class of unskilled labor, 
because he happened not to have had the chance to learn a trade, 
but will begin to realize that he can, in a measure at least, make 
up for the deficiency. 

The amount of work an ordinary untrained laborer does in a 
day, when paid by the day, and working as he prefers, is almost 
never more than one-third of what a good man, fitted for the job 
and properly directed, could do, and is usually much less. In 
such a simple case as shoveling coal, a skilled shoveler will 
shovel forty-five to fifty tons per day, while the ordinary laborer 
working for day's pay, and without any special direction, will 
shovel only from twelve to fifteen tons. 

A skilled worker, doing from two to four times as much work 
as the unskilled, forms better habits of work, and loses less time 
by absence from work than the unskilled. It is a noticeable fact 
that as the unskilled become more skillful and regular in their 
work, their health and general appearance distinctly improve. 
This has been particularly noticeable in the case of women. We 
set tasks which require them to do about three times as much as 
they had been in the habit of doing, and which was about 75 per 
cent of their maximum, and they invariably improved in health. 
This improvement in health seems to be due to a more regular 
and active life, combined with a greater interest in their work. 
It is a well-known fact that work in which we are interested, and 
which holds our attention, without any effort on our patt, tires us 
much less than that we have to force ourselves to do. The task 
with reward for its accomplishment produces this interest and 
holds the attention, with the invariable results of more work, bet- 
ter work, and better satisfied workers. When people get in the 
habit of working at high speed, they much prefer it. Just as 



TASK AND BONUS IN MANAGEMENT 487 

the man who has been trained to walk at the rate of four miles 
per hour gets accustomed to it, and prefers to walk fast rather 
than to walk slow. Working fast or working slow is simply a 
habit, and if you can train a person to do things quickly, he will 
get into the habit of doing three times as much work with substan- 
tially the same amount of effort and with no greater fatigue. 

Manufacturing Pillow-Cases. 

I am going to tell you about the application of our methods to 
a room where girls were running sewing-machines, and making 
sheets and pillow-cases. This was a very simple proposition, and 
as such is a good illustration of our methods in their most ele- 
mentary form. It is interesting to know that there was a general 
opinion that the work in this room was being done economically, 
for everybody seemed to be, and undoubtedly was, very busy. 
I felt a little discouraged, and told the proprietor in a few days 
that it did not look as if there was much profit in the work. In 
order to make any improvement, it was necessary to find out in 
detail : 

First: What the various operations of making a pillow-case or 
sheet consisted of, and how these operations were being per- 
formed ; in other words, to become familiar with the state of the 
art as it existed in that room. 

Second: To cut out any unnecessary operations, and to shorten 
the route traveled by each piece. 

Third: To develop the best way of performing each operation. 

Fourth: To set a proper task for each operation, and to offer a 
suitable bonus for its performance. 

Fifth: To train the girls to perform their tasks properly. 

In doing this work, I had the hearty cooperation and active 
assistance of Mr. T. W. Buscher, under whose superintendence 
this room came, and who for several years has worked with me. 
His assistance was very valuable in the first, second, and third 
parts of my work. The detail study was nearly all done by my 
assistant, Mr. T. P. Gates, who made the time studies, set the 
tasks, and trained the girls to perform them. 



488 LECTURE NOTES 

For the sake of simplicity, I shall confine myself to a descrip- 
tion of making pillow-cases. 

The first step was to analyze the work into the following neces- 
sary operations in the order given: 

1. Tearing the cloth into proper lengths; 

2. Sewing up the side ; 

3. Sewing up the end; 

4. Turning inside out (inspecting) ; 

5. Hemming; 

6. Sprinkling and (inspecting) ; 

7. Mangling or ironing; 

8. (Inspecting) and folding; 

9. Ticketing; 

10. Ribboning and bundling; 

11. Packing; 

and to learn thoroughly these operations. (Those in brackets 
were not done very systematically until the Task and Bonus 
System was established.) 

The second step was to rearrange the machines and the benches, 
so that successive operations could be performed with the least 
amount of transportation. 

The third step was to develop the best and quickest way to per- 
form each operation, and to have the work properly inspected and 
checked. 

The fourth step was to study in detail the time needed to per- 
form each operation, and to remove all obstacles so that the work 
could be repeated day after day, in the time set. 

The fifth step was to teach the girls to perform their tasks 
regularly. 

I have written the above descriptions as if each successive step 
was taken with all the operations at once. In reality, the process 
was much slower than that, and our real method was to take one 
or two operations at a time, and study them carefully, applying 
all the steps to them, and getting them on a permanent basis be- 
fore leaving them. 



^ 



TASK AND BONUS IN MANAGEMENT 489 

Siding and Felling, 

To begin with, we selected those operations which were most 
congested, and which were delaying the work most. These were 
No. 2 and No. 3 (technically known as Siding and Felling). The 
machines on which these operations were done were placed one 
ahead of the other, and the work was done tandem in the follow- 
ing manner: The first girl took the top pillow-case from a pile, 
sewed up the side, and pushed it on to a slide, which took it to 
the next girl, who sewed up the end and dropped it into a box 
beyond her machine. A third girl turned it inside out, inspected 
it, straightened it, and placed it on a truck. 

A careful study revealed the fact that, whereas the average 
number of pieces per hour sided and felled by a team of two girls 
during the week before we began our study was fifty-three, we 
were able to set a task of 142 per hour. The reward for the per- 
formance of this task is pay for the time allowed plus 20 per cent 
of that time. If the task is not accomplished the worker gets 
simply her day's pay. 

With this reward in sight, and with careful training and watch- 
ing two teams soon learned to earn their bonus every day. Fig. 
1 shows the increase in output per hour, the increase of wages 
when the bonus was earned, and the reduction of wages per one 
hundred pieces. 



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TASK AND BONUS IN MANAGEMENT 491 

The upper horizontal line represents the number per hour that 
must be done to get any bonus, the lower horizontal line repre- 
sents wages per one hundred pieces when the bonus is earned. 
This being constant, the pay, when the bonus is earned, amounts 
to a piece rate. Our method of payment then is piece-work for 
the skilled, and day-work for the unskilled, it being constantly 
borne in mind that if there is only work enough for a few, it will 
always be given to the skilled. This acts as a powerful stimulus to 
the unskilled, and all that have any ambition at all try to get into 
the Bonus Class. This cannot be too clearly borne in mind, for 
we have here all the advantages of day-work combined with those 
of piece-work, without the disadvantage of either, for the day- 
worker who has no ambition to become a bonus-worker usually 
of his own accord seeks work elsewhere, and our working force 
soon becomes composed of bonus-workers, and day-workers who 
are trying to become bonus-workers. When twenty-five per cent 
of the workers in a plant are bonus-workers, they, with those 
who are striving to get into their class, control the sentiment, and 
a strong spirit of cooperation develops. 

The inspector who turns the pillow-cases inside out must throw 
back to the girl responsible any piece defective in the sewing and 
put to one side any piece defective in material. If she handles all 
the work done by a team, and passes no bad work, she gets a fixed 
bonus of twenty cents per day. If she fails to do all the work, or 
passes a single piece of bad work, she gets no bonus. As soon as 
the siding and felling got to going, on bonus, the hemming, which 
is the next operation, became congested, and had to be speeded 
up. 

Hemming. 

A study was made of this, and a task of seventy-four pieces 
per hour set compared to a previous record of twenty-eight per 
hour (see Fig. 2). Only one girl out of the four was found able 
to perform the task at first, and she was taken sick a few days 
after the task work began, and was out several days, so the pro- 
duction line fell sharply after the first rise, as shown in Fig. 2. 
The great output of the siding and felling teams necessitated our 



492 LECTURE NOTES 

putting more green girls to hemming. They at first could do only 
about seventy-five per day, and for several weeks our production 
line sagged. As they became more skilled, however, it gradually 
rose, and finally got above the bonus line, the wages per one hun- 
dred pieces coming down to the piece-work line. The next drop 
in the production line was due to the fact that one of the bonus- 
workers left and had to be replaced by two green girls. 

Fig. 2 shows better, perhaps, than any other diagram that I 
have ever made the advantages of our system of Task and Bonus, 
by which the unskilled can earn day wages while becoming skilled, 
and then have a fair piece rate. This diagram illustrates the fact 
that if we had fixed a task and set for it a piece rate, we should 
have been obliged to confine our efforts to getting girls who were 
already skilled, for the unskilled ones could never have earned a 
living while acquiring the skill necessary to do the task. 

It must not be forgotten that during this time of training, our 
time-study man has given careful attention to the unskilled, taught 
them how to avoid loss of time, showed them wherein they 
worked differently from the skilled ones, and used every means 
to encourage them to become skillful. 

This element of training, which is lacking in the ordinary piece- 
work, we set great store by, and feel that we have done some 
real good when we have taught an unskilled worker to perform 
any operation skillfully. This diagram shows clearly that in 
day-work the pace was set by the unskilled, while in task-work 
the pace is that of the skilled. The fact that in day-work the pace 
is set by the slow and unskilled is well known, and the reason for 
it is obvious. It is a characteristic of human nature in general, 
not of day-workers only, to get all one can, and to give as little in 
return for it as possible. In this the capitalist sets the laborer an 
example by which he is not slow to profit. He pays the smallest 
wages for which he can hire men, and the men in return do only 
the amount of work needed to hold their jobs, and thus their 
interests are opposed. Wherever the Task and Bonus system 
has been applied, this condition has been reversed, for all strive 
to do their best, and are happy in their work. 

I said before that the task workers improved in health, and 



TASK AND BONUS IN MANAGEMENT 493 

have stated that this is most marked in the case of women, who, 
as soon as they acquire the proper skill to do their task regularly, 
become much more cheerful, and take a far greater interest in 
their work. This interest is best illustrated by the peak in the 
production line in Fig. 1, which was the result of a race between 
two teams, lasting several days. 

Tearing. 

Fig. 3 represents in a similar way the tearing of the cloth into 
pieces the proper size for pillow-cases. Note that the production 
line at once ran above the task line, and stayed there, the wages 
per one hundred pieces coming down at once to the minimum 
rate. The peak in the production line here was also the result of 
a race. 

These races are the best indication of the spirit in the room, 
and of the entire confidence of the workers that the rates will be 
permanent. 

Study of Diagrams. 

These three diagrams are worthy of careful study, for they 
illustrate some important facts : 

First: You will notice that the production line gradually ceases 
to be full of ups and downs, but becomes comparatively straight, 
and approximately horizontal, with a slight upward tendency; 
the workers have taken their best normal gait, which increases 
slightly with growing skill. 

Second: This best normal gait under our direction produces 
about three times as much output as the average gait under the 
old system of day-work and supervision. 

Third: The output of the skilled workers is approximately 10 
per cent greater than the task, except in Fig. 2, which includes 
the work of some unskilled workers, indicating that we have 
allowed approximately the same margin in setting each task. We 
could have made their margin smaller, but it would have taken 
longer to train our workers. The amount of a margin to be al- 
lowed in any case depends upon whether it is more important to 
get task-work started quickly, or to get the greatest possible 
economy in the long run. 







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TASK AND BONUS IN MANAGEMENT 495 

Fourth: The best normal gait is distinctly below the racing 
gait, although it tends gradually to increase. The workers may 
some day do normally what they can now do only on a spurt. 

Fifth: The wages per one hundred pieces are less than one- 
half of what they were, while the output is increased two hundred 
per cent. 

Comparison of Results. 

The comment of most people on reading these results will be 
that the conditions must have been very bad to admit of such 
improvement. I will admit that they were bad; but the man- 
agement apparently thought otherwise, for the room had been 
kept carefully locked, and nobody was allowed to see the methods 
employed. The fact is, they were no worse than those that exist 
in most manufacturing plants where day-work and the ordinary 
untrained foreman are depended upon for efficiency. 

From the experience of Mr. F. W. Taylor,* Mr. Carl G. Barth, 
and the writer, almost unlimited examples could be cited illustrat- 
ing the fact that ordinary management and day's pay seldom 
produce more than one-third of what is possible. These examples 
can be drawn from such widely varying classes of work as shovel- 
ing coal, turning steel, folding cloth, barking wood, etc. One ex- 
ample, however, is worth giving in detail as follows: 

A concern for which I was doing some work bought a machine 
for drying cloth which had been highly recommended. There 
was considerable difficulty in getting the machine to work right, * 
but we finally got it to dry medium- weight cloth at the rate of 160 
yards per minute, and set a task of 140 yards per minute, which is 
being done all day and every day. Before we got the machine to 
running properly, and while we were trying to overcome some of 
the obstacles, we asked permission to have our mechanic go and 
see a machine which was said to be running properly, and giving 
satisfaction. Our mechanic took occasion to find out just how 
many yards that machine dried on the day he was there (it ran 
all day), and found it averaged thirty- two yards per minute. Our 

♦Stevens, '83. 



496 LECTURE NOTES 

task of 140 yards per minute is nearly 4.4 times as much as was 
held to be good work by a very successful company. 

Quality of Work. 

About the time our Task and Bonus system had gotten well 
started in our sheet and pillow-case factory, a customer with 
whom we had just begun to do business returned several cases of 
goods on account of defective sewing. On hearing that these 
cases were coming back, the foreman stated that he was not sur- 
prised, as it was impossible to do good work at the speed we were 
working. When the cases arrived, it turned out that all the work 
returned had been done before the Task and Bonus system was 
started. The management at once ordered all the cases on hand, 
about one hundred, to be opened and inspected, it being incon- 
ceivable to them that the task work could be better than the day 
work. The result was, that while the work done before the in- 
stallation of the Task and Bonus system was about the same as 
that returned, that done after the installation of the Task and 
Bonus system was practically perfect. The ratio of imperfections 
before and after being 50 to 1. 

Summary. 

The results of the Task and Bonus system may be divided into 
two classes: Those that benefit the employer: 

Quicker work; 
Cheaper work; 
Better work; 

and those that benefit the employee: 

Better wages; 

Increased skill, and better habits of work; 

More pleasure in work. 

The only items in this list that need any comment are the third 
and the last. We have better work, first because of our careful 
inspection, and also because the attention needed to do high-speed 
work keeps the mind of the worker on what he is doing, and he 



1 



TASK AND BONUS IN MANAGEMENT 497 

rapidly improves in skill. With growing skill comes increasing 
pride in doing the work well. These same factors make for 
greater pleasure in work. Our bonus-workers cease to re- 
gard the clock as a monitor keeping them at work, but race with 
it to the end of the day, and feel a pride in doing more than their 
task, and a satisfaction in getting the increased pay. The total 
result is cooperation of the highest kind, for not only is each 
worker doing his best, but doing it in accordance with a care- 
fully planned scheme and the best instructions available. The 
individuality of the worker is allowed full play, but not until 
after he is taught to perform his task by the best method we can 
devise, and then subject to the conditions that he must not depart 
from that method without permission. His improvement must 
receive the approval of the task setter, who will see that it con- 
forms to our general scheme. 

When these methods here have been perfectly installed, it is 
not infrequent to find work which has been done at a loss, yield- 
ing a handsome profit, and plants that were entirely inadequate 
for the work they had to do under the old system, having double 
their former capacity under the new system. 

These facts force upon us the conclusion that before building a 
new plant, or even increasing the size of the old one, we should 
make a thorough study of the work being done, and assure our- 
selves that the plant is being operated in such a harmonious man- 
ner that we are really obtaining the maximum output. Such an 
investigation will usually demonstrate that better management 
and not a larger plant is needed. If it should also show the need 
of a larger plant, such a plant can then be built much more intelli- 
gently than before the investigation was made. 



COSTS 

By 
J. Newton Gunn 

So long as men buy and sell for gain, so long must cost be the 
standard for measuring efficiency of operation and excellence of 
management. 

So long as labor is employed in different states and countries 
under varying compensation and standards of living, so long 
will an exact knowledge of costs be increasingly required of both 
producer and statesman. 

Producers have but narrowly construed the term so that an 
apparently low cost of yesterday is shown by to-day's better 
experience and knowledge of some neglected element to be not 
only erroneous but wasteful. 

It is difficult to understand how that most vital problem of 
fixing our tariff has been always attempted with an ignorance on 
the part of the legislators that may be described only as epic. 
Scarcely less serious is the lack of basic facts in the extensive 
legislation and attempted control of various public service cor- 
porations. In every instance where cost and selling price were 
involved no single instance is known where even an attempt was 
made to establish costs on a scientific basis and standardized as 
between the undertakings affected. 

In a study of costs of production for over twenty-five years 
in many hundreds of establishments in Europe and America, the 
writer has not found an instance where the elements of cost have 
really varied or where the following formulae and principles if 
applied would not have secured more stable conditions to the 
management. 

The study of costs rightly considered is the study of the vital 
statistics of the whole of a business. A proper agreement is 
therefore necessary as to the real ends to be sought. 

A misapprehension exists or is apt to exist in the proper defini- 
tion of this title. Cost should always be a statement of fact in 



COSTS 499 

contradistinction to an estimate which may or may not agree 
with the real cost. The development of cost study is due to the 
realization on the part of the more thoughtful producers that 
a most exact knowledge of cost is necessary in order to meet or 
withdraw from unintelligent and destructive competition if the 
latter by education cannot be eliminated. 

It is no satisfaction to a producer to know that the ignorance 
of his competitor will destroy that competitor, if another equally 
ignorant and dangerous follow him. The only hope lies in a 
complete education of all who enter a given competitive field, else 
that field is hazardous. 

This unintelligence was and is still exhibited : 

a. By the manufacturer having a variety of articles which he 
produces in one shop, averaged or estimated as to costs in such 
manner as to conceal the losses on one article by the larger 
profits of the other. 

b. By the continuance of manufacture and sale of an article 
at possible loss under the apprehension that it was a necessary 
trade condition to have ''leaders" carry or make the market 
for other lines which are highly profitable but high priced. 
Smug satisfaction in this policy suppresses the real facts as to 
the aggregate losses — frequently large — as against aggregate 
profits, too frequently inadequate. 

c. By the fancied importance of keeping to a very small item 
the amount of so-called red tape and clerical work; this latter 
consideration in the manufacturer's mind has been very properly 
enlarged by the extension of the so-called cost systems devised 
by those lacking accurate knowledge of manufacture or of the 
operation of any enterprise. 

d. By the lack of appreciation of the vital necessity of having 
any facts used in the operating department capable of proof in 
the final accounts of the corporation or firm. 

e. By the lack of carefully planned and organized knowledge 
and means of using cost facts in modifying methods of produc- 
tion or in the selection of articles for sale or for the control of 
markets. 



500 LECTURE NOTES 

The deficiencies noted in the foregoing are still shown, due to 
ignorance of the real elements of cost of production and the 
ignorance of the real purpose of costs and the confounding of 
cost finding with systems of bookkeeping. 

The absolute standardization of cost formulae in all industries 
is essential if we are to have any intelligent tariff revision, and 
control and protection of corporations by the government, and 
any effective legislation for the regulation of trade. 

This discussion of costs is designedly elementary and is not 
concerned with the mechanism of cost finding. Unfortunately 
for the manufacturer, the general practice is to give much atten- 
tion to the mechanism and to rest in ignorance of the theory of 
costs. The specific illustrations herein will refer more particu- 
larly to shop costs or costs of manufacturing but will apply in 
every way as well to costs of engineering enterprises of any 
nature. In the securing of costs in a specific case it is necessary 
to regard: 

a. The character of the enterprise. 

b. The value of the information when secured. 

c. What use should be made of the facts. 

d. The provision in the organization of having the facts used 
as intended. 

e. Whether or not those for whom the facts are intended are 
competent to use them. 

f . Whether through proper inspection there is assurance that 
the facts have been used. 

g. In what degree of refinement should the costs be presented. 

Costs should be broadly divided into two classes : 

a. Monetary costs or those in which the several elements are 
expressed in terms of value ; i.e. the cost value of fur in a hat, or 
pig iron in a perfect casting, or lumber in a wagon. 

b. Physical costs or those in which the elements are expressed 
in terms of quantity of the various items composing each unit of 
product; i.e. the number of ounces of fur of a given quality in 
a hat, or the number of pounds of pig iron to produce one hun- 



COSTS 501 

dred pounds of good castings or the number of feet of lumber in 
the body of a wagon. 

Economically all value in production is the result of the expen- 
diture of labor. John digs from the hillside, which he has pre- 
empted, certain iron ore which he sells to William. John has 
only expended labor and sells his ore to William as the price of 
his labor. He has one element of cost. 

William takes the ore and expends his own and employed 
labor in converting the ore into pig iron. His cost consists of 
his labor, plus the ore representing John's labor, which is 
William's raw material. William, however, has other elements 
of cost. The power in furnishing the blast requires both labor 
and materials; and because the costs so incurred are indirect 
they are called expense ; that is, mill expense or factory expense. 

William, too, employs many men and because his operations 
are large has an administrative office and men employed in 
selling his pig iron. This is expense but because it is not so 
directly related to production as the factory expense, is called 
commercial expense and is divided as administrative and selling 
expense. 

So that while all costs of production may be analysed and 
traced back to the one element of labor, in practice we have 
material, labor and expense. 

Each of these major divisions of cost is subject to subdivision 
arbitrarily. Such subdivisions are useful in giving a basis for the 
easier determination of cost and are useful in cost comparisons 
and reduction. 

Labor is broadly divided as direct and indirect ; or less happily 
and inaccurately referred to as productive and non-productive. 

Direct labor is that which may be accurately observed and 
allocated to some specific operation on or to some portion of the 
product — as digging a trench, turning in a lathe the rough casting 
that becomes a fly wheel or painting a wagon. 

Indirect labor is that which, while as necessary as the direct 
labor, is not easily charged to a specific item or article or product 
— as superintending the ''gang" digging the trench, attending 



502 LECTURE NOTES 

the engine that drives the lathe, or buying or accounting for the 
paint or the labor used in the wagon plant. Indirect labor is 
treated as a part of factory expense or construction expense. 

Direct material (as more frequently termed raw material) is 
that which enters directly into the article or work and which 
becomes part of the finished product, as cotton for thread or 
copper and spelter for the brass in lamp burners. 

Indirect material (or as frequently termed mill supplies and 
factory supplies) is that which while absolutely necessary to pro- 
duction does not physically enter into the articles made; as oil 
and waste for the machinery, coal for the boilers or stationery 
for factory and engineering records. Indirect material can only 
in a few cases be allocated to a specific object of production and 
is therefore treated as factory expense. 

Other factory or construction expenses are generally incurred 
which do not readily fall under either classification of indirect 
labor or indirect material. Rentals of water from city mains; 
steam, gas or electricity from municipal or other outside plants 
are such indirect expenses. Such outlays are always a part of 
factory expense. 

A necessary accessory to production is the repair or current 
renewal or provision for restoration and substitution of the tools 
of production. The provision for restoration and substitution of 
plant is ordinarily referred to as depreciation ; but any provision 
for depreciation must ever include provision for antiquation or 
obsolescence of plant. The essential reason for including depre- 
ciation as a necessary item in expense is the obligation that rests 
on the industrial entrepreneur for the preservation intact of the 
capital entrusted to him. It matters not whether this capital he 
his own or his fellows' ; it matters not whether the time between 
occasions of substituting new plant for old be long or short, it 
is as essential to charge into the cost of the carpet the price of 
the exhausted capital in the wearing out of the loom, as the cost 
of the bucket that dipped the dye from vat to vat. It is therefore 
but an arbitrary distinction and a fallacious one that treats the 
price of the file smoothing the casting as a present cost and the 
price of the lathe worn out in planing a thousand castings as a 



COSTS 503 

cost to be lightly considered by manager or directors or regu- 
lators of corporations as pleases their fancy. It is not the 
general practice to charge depreciation as an item of factory 
expense but to more frequently take it from surplus earnings. 
This is done because the earnings of the undertaking may vary 
so widely from year to year while the necessity for making the 
cash outlay as a result of depreciation and obsolescence may be 
deferred. 

The most satisfactory costs and those most nearly correct will 
be secured if certain sums be charged in factory or mill or con- 
struction or operating expense which shall be credited to reserves 
for repairs, current renewals and depreciation, and when the 
cash outlay is made for either or all of these three last items it 
should be charged against established reserves. The determina- 
tion of these reserves and the calculation of the physical life and 
antiquation of plant is a subject which has no immediate place in 
this discussion. 

The foregoing may be considered as fairly defining all the 
elements of factory or mill or construction costs. 

Any other indirect costs than factory expenses are not included 
up to this point as they do not bear so direct a relation to pro- 
duction; being directed to the financial or selling or general 
administrative ends. 

Commercial expense as distinct from factory expense may be 
well divided into administrative expense and selling expense. 

In administrative expense may be included all that outlay for 
the cost of conducting the business; as the salaries of officers, 
general stationery, telephones, telegrams and postage; taxes to 
compensate the state for protection and for government; insur- 
ance to protect the capital of the partners and shareholders from 
impairment by fire, by the death of an important officer or partner 
in whose personality was vested considerable good will. 

In selling expense may be included those expenditures for 
salaries and commissions of salesmen or sales agents ; for adver- 
tising and publicity; for traveling expenses; and any other 
charges incidental to marketing the product. 

The consideration of how these various indirect elements of 



504 LECTURE NOTES 

cost — factory expense, administrative expense and selling expense 
— shall be calculated for a specific article or object of production 
is purposely deferred for discussion elsewhere. 

Interest on borrowed or partners or shareholders capital is 
not properly an element of cost. Interest should rather be con- 
sidered as profit resulting from the employment of capital. It is 
not, however, important to have a discussion of this part of the 
subject further than to say that if it is included in cost it must 
be so completely segregated and so clearly defined in the records 
of the undertaking that it may not be confounded with the 
elements of cost properly so called. 

It is frequently the practice to include in cost only that interest 
on borrowed capital or interest at some arbitrary rate on such 
part of the entire capital as may be invested in plant or prop- 
erty. Either of these latter practices is to be particularly 
deplored as a half way measure. 

In order to express these several elements of cost set forth 
above, the following formulae may be useful. (Formula 1.) 
(See note 1.) 

m=material (raw or direct). 
1 =direct labor. 

X = factory expense (or mill expense or construction expense, 
including d — reserves for depreciation). 

Ci= factory cost. 

a ^administrative expense. 

s = selling expense. 

C2==cost sold. 

i = interest or charges for capital. 

C3=minimum selling price. 

It will be useful to identify the various elements or groups of 
elements of cost, with corresponding items in a loss and gain 
statement. 



COSTS 505 

For example: 

ITEM. ELEMENTS OF COST. 

(1) Sales ==: 

(2) Cost of sales = (ci) 

(3) Gross profit = 

(4) Commercial expense, i.e., 

Administrative expense = (a) 

Selling expense = (s) 



(5) Net profits == 

(6) Interest = (i) 

Note 1. Modifications of the first formula are given herewith and in conjunction 
with the text are self-explanatory. 

(Formula 2.) 
m=raw material. 
1 =direct labor. 
X ^factory expense. 

Ci=factory cost 

a rradministrative expense. 

s =:selling expense. 

d rrreserve for depreciation. 

Ca^cost sold. 

i ==interest or charges for capital. 

C3=:final cost or minimum selling price. 

or if these formulae be expressed in better mathematical form we would have Formula 

3, corresponding to Formula 1: 

m+l+x=Ci 

Ci+a4-s=:c2 

C2+i=C3 

or Formula 4 corresponding to Formula 2: 

m4-l+x=Ci 
Ci+a-f-s+d=:c2 

C2+i=:C3 



As important as exactly stating the elements of cost is the 
insurance of the accuracy of the facts. It is futile to know that 
the weight and value of raw material is 1,000 pounds, costing 
$20, if the record of the finished weight of the articles made 
therefrom shows 800 pounds instead of 950 pounds; giving an 
apparent material cost for the finished article of 2.5 cents in place 
of 2.2 cents per pound. Yet such errors do continually occur 



506 LECTURE NOTES 

through faults in the factory organization that fails to inspect 
and ensure accurate scales. 

Careful criticism and provision for the sources of information 
is therefore necessary. 

Making such provision invariably involves present examination 
of the whole organization. All of those functions of an organi- 
zation having to do with the securing, tabulating and using of its 
vital statistics must perform their work not alone accurately, but 
promptly, regularly, uniformly, and economically : promptly that 
the information may be available before the occasion or event 
has become history; regularly that the values through compari- 
son and current use may be secured; uniformly that the state- 
ment of to-day may be comparable with that of yesterday; eco- 
nomically that the cost of getting costs shall not minimize the 
value of the information. 

In discussing the relation of costs to the general organization, 
it must be at once appreciated that that department, which has 
the supervision of securing, tabulating and digesting for use, 
cost facts is but a part of the entire organization. Many of the 
disappointments and defects in schemes of cost determination are 
in the belief that cost finding is an end in itself and that it may 
be undertaken irrespective of the condition of the organization. 
It is a waste of time to consider the cost problem alone; coinci- 
dental consideration is given to the condition of the organization 
and the correction in it of the fundamental defects of manage- 
ment. The reason for this will be quite clear with a single 
illustration : 

Let us conceive that it is desired to get accurate costs in an 
establishment where there is no centralized control of the receipt, 
care and disbursement of material and stores ; it is further 
assumed that in this establishment these materials and stores are 
distributed for fancied convenience in the various departments 
and places where the materials are to be used and under the 
general supervision of many foremen or sub-foremen. 

Under such a condition an accurate record of materials con- 
sumed will be impossible, to say nothing of getting accurate con- 
trol of the materials, unless an attempt be made to go further and 



COSTS 507 

establish this control on lines of modern management which 
demands that there shall be pre-determination of the materials 
that should be used, rather than alone a record of materials that 
have been used. 

All of the problems of organization which should be consid- 
ered in connection with the utilization of the best efforts of a cost 
department may not be enumerated and described within the 
limits of this article, as these must to some extent vary with the 
magnitude of the undertaking under consideration. From the 
foregoing illustration, however, it will be perfectly clear that a 
recognition of specific functions or departments in the organi- 
zation must be established; such as the departments controlling 
stores of materials; directing and recording the performance of 
labor ; the custody, maintenance and direction in use of tools and 
equipment; and that department which coordinates all of the 
records of an accounting nature, both in the office and in the 
factory. 

The importance of the departmental or functional dividing of 
the business is not limited to the advantages to be gained by the 
securing of accurate operating facts, but is equally important in 
the elimination of wasteful and duplicating effort on the part of 
the management. 

Next in order of importance is to insure the organization of 
what for a better term may be described as the order systems; 
that there may be some number or symbol against which every 
item of expenditure of labor — direct or indirect — of material — 
direct or indirect — or of expense — either factory, administrative 
or selling expense — may be charged. For no reliable information 
of performance will be secured until every item of expenditure 
is provided for under such a classification of objects of expendi- 
ture as will be useful not alone to the accountant but also, and 
first, to those concerned in the operation of the undertaking. 

The sources of cost or cost facts, that is, the sources from 
which the initial information must come, of necessity must be 
under the immediate direction of a grade of labor lower than 
that which is responsible for the general administration and 
planning of the affairs of the business, such as the recording of 



508 LECTURE NOTES 

the time taken in the performance of work, or the recording of 
scale weights of materials consumed. While low grade labor 
must be depended upon for the performance of the duties inci- 
dental to the securing of such records, this labor must be under 
the organized control of a special department that secures, 
through predetermination of method and inspection the accuracy 
of the result. 

Not only must the sources of information as to expenditure 
be guarded and carefully organized, but of equal importance is 
the securing of the information relative to the work performed. 
Briefly stated, it is the importance of the divisor. Many instances 
have been found in which, while the factory had been fairly well 
organized as to its functions, and accuracy had been secured of 
original records of expenditure of material and labor, the results 
shown in their costs were entirely unsatisfactory and unreliable, 
due to the inaccuracy of the record of the product or of the work 
performed. 

It has been previously stated that this article is not concerned 
with the mechanism of cost finding, but it will readily be under- 
stood that if the foregoing principles are recognized and estab- 
lished in practice in any concern, it is of little moment whether 
the mechanism that actually records, tabulates and presents the 
cost facts is economical or not. For instance, in a concern em- 
ploying 5,000 men, where, through failure to properly direct the 
performance of these laborers, there may be a lost efficiency of 
from 10 to 40 per cent, it is manifestly unimportant whether 
there be employed in connection with the statistical department 
fifty men, or seventy-five, if by employing the larger number, 
accuracy of facts and promptness of presentation of these facts 
would be secured. 

No discussion is attempted of the various methods of distribut- 
ing indirect expense further than establishing the principle that 
there is no relation between factory expense, administrative ex- 
pense and selling expense that would make it possible to lay down 
one rule for the loading of these items on to the cost of the pro- 
duct. Ordinarily, factory expenses bear a more direct relation 
to the value of direct labor than they do to the value of the mate- 



COSTS 509 

rial; and more frequently still, factory expense varies directly 
as the time through which the labor is expended. In other in- 
stances these expenses may be better distributed on to the product 
by the units of product completed. In undertakings where there 
is a very great variation of the cost value of the tools employed 
in production in the same or various departments, it is found 
desirable to load the factory expenses by establishing a machine 
rate; that is, a rate per hour of machine performance, which 
absorbs, sometimes, the direct labor and also all the expenses inci- 
dental to the operation of the department or the machine, properly 
to be classified under factory expense. 

The uses of costs have been broadly shown in the earlier part 
of this article, but recognition should be given to the diversity of 
forms of management, ranging from that form in which through 
lack of appreciation or lack of ability to use information only 
historical costs and those of a simpler character will be needed, to 
that type of sound management which is concerned, not so much 
with what has happened in the business, as to insure by pre- 
determination through well-directed scientific effort, the result 
so necessary to successful operation. 

This preassurance of cost within narrow limits involves the 
predeterminization and standardization in every detail of the 
design of the product, the quality, price and quantity of materials 
used; the quality, price and quantity of labor used; the kind of 
equipment, the specific tool and its speeds and feeds, as well as 
the sequence of operations and the specific instructions that shall 
guide the operative in his performance. 



AN ANALYSIS OF WORK 

By 
Herman Schneider 

In medicine there are two types of doctors — one at once treats 
superficial symptoms and one first searches for the basic cause 
and then prescribes. The first kind gives a headache powder; 
the second finds the functional disorder which causes the head- 
ache and works to remove it permanently. In the long run, the 
first doctor weakens the resisting power of his patient, while the 
second strengthens it. 

We are paralleling this in our treatment of industrial ills. 
When there is a general or a particular industrial breakdown, 
we want immediate relief and take the headache powder cure. 
Ills in the form of numerous strikes, profit-killing foreign com- 
petition, inadequately skilled artisans, large groups of workers 
constantly shifting and drifting aimlessly from one occupation to 
another, and an increasing feeling of centrifugal tension where 
solidarity should exist — these are pressing more urgently day by 
day; and in response to the need, there have arisen Doctors of 
Industry, skilled and quack, in rapidly increasing numbers. They 
are generally specialists — one for the head, another for the heart, 
another for the stomach ; and the body politic is being treated by 
each independently. 

The ills are all ills that grow out of work. They are not a 
mysterious wasting-away, visitations of Providence, fits brewed 
by the powers of darkness, or something that runs in the family, 
any more than headache is. The causes are real and lie within 
the realm of Natural Law. Therefore, the logical starting point 
of a diagnosis must be to ascertain the Natural Laws of Work, 
non-conformity to which causes our industrial headaches. 

Now there is a natural law of labor which operates as surely 
as the law of gravity. 

Work is human effort put forth for the satisfaction of wants. 
. It can be shown by history that a people who will not work will 
fall to swift decay. If you look back along the highway over 



AN ANALYSIS OF WORK 511 

which civiHzation has come, you will see that, except where great 
physical upheavals of nature, or brute strength in overwhelming 
numbers have been factors, nation after nation has fallen, because 
of non-conformity to the law of labor. Every man knows that he 
will deteriorate physically and later mentally if his muscles are 
not used. The law could be established scientifically if need be, 
but it is not necessary, for in this case common observation, 
science, and religion all agree. Our proverbs, sacred and secular, 
affirm it. The cycle of work to wealth, wealth to idleness, idle- 
ness to poverty and poverty to work again, is an evidence of 
mental inefficiency, following physical decline. 

The substance of the law of labor is this : Work and you will 
reach a higher mental development; cease work and you will 
degenerate. The law applies to individuals, to communities, to 
nations, and to civilizations. 

As a compelling prod to drive humanity to save itself, there is 
another Natural Law, which needs no proof. Simply stated, it 
is work or starve. 

We work because we have to. There is an instinct for work, 
but basically it is the instinct for self-preservation and self- 
perpetuation. If all the world had a climate like that of the South 
Sea Islands, it is safe to say none of us would work. Had 
Nature provided initially for all of man's needs, it is probable that 
we should be without complex problems, without wars, without 
government, without what we call civilization — without work. 
The struggle for existence has brought us to our present stage of 
development. All that is best in the history of civilization has 
come from work, and all that is worst, from idleness and the con- 
sequent sins of idleness. Mentality is the result of physical activ- 
ity, and in turn stimulates it. Thinking and working are recip- 
rocal aids. Integrity, honesty, discipline, sound health, fair 
dealing, respect for others' rights — these have come through the 
assumption of one's burden of work, and the opposites of these 
are the result of the desire to dodge the burden. 

Now of all the products of the labor of the centuries, there are 
probably none to which we of this generation look with more 
satisfaction than to our scientific achievement and our mechanical 



512 LECTURE NOTES 

ingenuity. And yet these two distinguishing elements of our 
modern civiHzation have set up barriers to the realization, by the 
majority of workers, of the greatest benefit of work, namely, 
mental development ; for they have wrought significant changes in 
the conditions of work. 

In the first place, it is only within the past two generations that 
mankind has worked in masses within walls. For centuries men 
did individual, self-directed work almost entirely in the open. The 
change has come, of course, through the development of power 
devices, and dates virtually from the invention of the steam 
engine. 

In the second place, the industrial worker formerly knew a 
whole job, rather than a part of it; he performed a great variety 
of functions in the completion of his task, instead of endlessly 
repeating the same limited operation. The clockmaker made a 
whole clock, working individually, and the necessity of working 
out every part's relation to every other part gave the worker a 
mental stimulus, and, therefore, a higher mental development. 
The finished product was all his own; the desire for self- 
expression which every man has, found an outlet through his 
work; and once having served his thorough apprenticeship, he 
worked largely by self -direction. Under our present highly 
organized industrial conditions, the making of a clock is sub- 
divided into a large number of distinct operations. Each work- 
man in a clock factory makes piece after piece of the same kind, 
principally by feeding material into a machine, but why he does 
it he need not know and usually is not told. We are putting the 
brains into the machine and into the management ofifice, and mak- 
ing the workman a purely automatic adjunct. It is unquestion- 
able that much of the present spirit of industrial unrest is 
Nature's protest against work without Hght, physical and mental. 

This purely automatic, high-pressure work in closely crowded 
rooms is the most ominous feature of modern industrialism, its 
most serious aspect being the effect upon mental development. 
Scientific research has shown us that the monotonous rhythmic 
repetitions of the machine's motion and the monotonous rhythmic 
motion of feeding the machine, produce an hypnotic, deadening 



AN ANALYSIS OF WORK 513 

influence on the mind. The lower brain centers, controlling 
habits, are developed at the expense of the higher thinking 
centers. As the habit becomes ingrained, the worker becomes 
more lethargic and automatic, and almost as incapable of inde- 
pendent, intelligent action as the machine itself. Research 
further shows that the higher centers in the brain of such a 
worker are in danger of getting into a permanent, inelastic, hope- 
less set, if a lively stimulus is not supplied. 

Further, there is in every individual a desire for self-expres- 
sion, and if this cannot be had in one's daily work, Nature will 
force an outlet for it. It cannot be dammed up very long; and 
when there is no outlet for it in the worker's daily task, it must 
come during his idle hours, and sometimes takes a form which 
leads to many of our most vexing sociological problems. 

The situation, then, sifts down to this: Energizing work is 
decreasing; enervating work is increasing. In spite of the warn- 
ings of history, we are rapidly dividing mankind into a staif of 
mental workers and an army of purely physical workers. The 
physical workers are becoming more and more automatic with 
the sure result that their minds are becoming more and more 
lethargic. The work itself is not character building; on the con- 
trary, it is repressive, and when self-expression comes, it is hardly 
energizing mentally. The real menace lies in the fact that in a 
self-governing industrial community the minds of the majority 
are in danger of becoming atrophied, or at best of becoming 
trifling and irresponsible, because of lack of continuous exercise 
in conjunction with the earning of a livelihood. The kind of 
citizenship that a republic needs cannot be built on sixty hours 
per week of automatic work. But we cannot reverse our present 
economic order of things. Automatic work is increasing and will 
continue to increase for a long time to come. The condition is 
here and philosophical discussion will not remove it. 

It is evident, then, that the general law of labor must be divided 
into two parts, namely. The Law of Energizing Work, which 
makes for progress, and The Law of Enervating Work, which 
makes for retrogression. Nearly all the work still done in the 
open air, where there is a dependent sequence of operation, in- 



514 LECTURE NOTES 

volving planning on the part of the worker, is energizing work. 
Specific examples may be cited in farm work, railroad work and 
the building trades. Certain work done indoors, under good con- 
ditions of light and air, is also energizing; for example, the work 
of a toolmaker, a locomotive assembler, and a cabinet maker. 
The enervating work has come through the subdivision of labor 
in factories, so that each worker does one thing over and over in 
the smallest number of cubic feet of space. This type is recog- 
nizable at once in the routine of the garment worker, the punch 
press operator, the paper box maker, the shoe worker, etc. 

Aside from the broader factors such as climatic conditions and 
racial characteristics, it is safe to say that the morale of a com- 
munity depends upon the kind of work it does. A rural com- 
munity of about twelve thousand people, having clean political 
conditions, a high moral tone, few jarring families, well-kept 
gardens, and a good average of intelligence, is a desirable place, 
from the manufacturer's viewpoint, in which to locate a factory. 
If a manufacturer locates in such a place and employs three 
thousand of the men, women and children in purely automatic, 
noisy, high-speed work, the town will change very materially in 
one generation. Its politics will become corrupt and its morals 
lax; its citizenship will lose its former mental stability and fly 
eagerly and earnestly from one spectacular *'ism" to another; its 
families will be on nervous edge with family discipline gone ; its 
yards and houses will lose their tidiness; saloons will increase; 
in a word it will become "a factory town." And what was once 
a good community with a high community efficiency, and there- 
fore a safe place in which to invest money, becomes a town of 
low community efficiency and a constant menace to the industry 
itself. Every detail of the town's life is affected. Religion lags, 
while the amusement parks thrive on Sunday ; for since the week- 
day work is repressive, an outlet for pronounced self-expression 
is demanded in the idle hours — or to put it another way. Nature 
goes on the defensive. The slowly up-built appreciation of the 
fine arts is quickly destroyed, for this cannot grow without 
harmony, orderly thought and the desire to express ideals. 
Respect for law diminishes, for the law is put in the same class 



AN ANALYSIS OF WORK 515 

as an electrically wired strike fence. These significant changes 
are not the fault of the people who work ; they are logical natural 
products of the work itself. 

For the purpose of analyzing work, a scale has been devised, 
in which the most energizing work is at the 100 per cent point, 
and the most enervating at the zero point. The 100 per cent 
work is that of the locomotive engineer. This has been selected 
because his work has the following elements : 

(a) It is done in the open air. 

(b) It provides a well-rounded physical development. 

(c) The constant improvements in locomotive design and 
railway appliances generally require continuous mental develop- 
ment. 

(d) Mental alertness is constantly required for emergencies. 

(e) A comprehensive grasp of the whole interdependent 
scheme of production (a railroad produces transportation) is 
essential. 

(f) The conditions under which^ the same run is made are 
never alike. 

(g) The work itself, — not lectures or preachments or popular 
acclaim, — the work itself breeds in the engineer the highest 
quality of good citizenship; namely, an instant willingness to 
sacrifice himself for the lives in the train behind him. 

The zero points on the scale, or the most enervating work, is 
the work of a girl in her formative years in a steam laundry, 
when the following elements prevail : 

(a) Supersaturated, vitiated air. 

(b) Standing in a strained position. 

(c) The work consisting of feeding one piece after another of 
the same kind at high speed into a machine. 

(d) The hours of work being so long that fatigue poisons 
accumulate. 

The scale is crude and lacks scientific accuracy. A statement, 
for example, that the work of a laster in a shoe factory is 40 per 
cent energizing would be a guess. But the purpose of the scale is 



516 LECTURE NOTES 

not so much to arrive at a percentage as to establish some standard 
of actual work for the purpose of diagnosis and treatment. Three 
investigators, analyzing the work of a laster, might classify it as 
30 per cent, 40 per cent and 50 per cent energizing. The differ- 
ences in their classifications would lead to a closer analysis, and 
hence to a surer treatment. 

To take a specific analysis, consider two adjoining weave sheds 
of a silk mill. Going first to Mill A, you find a long room with an 
aisle down the center, on each side of which are the machines. 
Between the machines there is ample space for the operative 
(nearly always a girl) to go up and down tying the broken 
threads. In the main aisle and adjacent to each machine is a 
chair. When the girl has finished one round of her machines, she 
rests for a short period of time, and in this way fatigue is pre- 
vented. The two girls of adjoining machines usually time their 
rounds so that their rests come at the same time. The noise in 
the mill is so slight that they can converse without any effort. In 
the center of the room in the main aisle is a washstand at- which 
there are usually about six girls, cleaning gum from their hands. 
The light is good, the air is not vitiated, the rest periods are suffi- 
cient, and there is no nervous tension from noise or speed, the 
work is not monotonously automatic, the position of the body is 
not strained; but on the contrary, many muscles are lightly 
brought into play. However, the work itself does not stimulate 
any mental activity, nor develop any of the finer and higher 
mental qualities. It may be classed as about 70 per cent ener- 
gizing. 

The silk after leaving this mill is sent to Mill B, where a 
number of strands are woven into a single strong strand. Since 
the silk is strengthened, the machine can be run at higher speed. 
On entering Mill B one is confronted with a noise so great that 
talking is entirely out of the question. The layout at Mill B is 
precisely the same as at Mill A, except that there are no chairs 
in the aisle. There are no rests between the rounds which the 
operator makes of the machines, since the speed does not permit. 
Talking is impossible because of the noise. This mill is at once 
diagnosed as the sore spot of the concern. The investigator is 



AN ANALYSIS OF WORK 517 

enabled to say to the owner : 'This is your trouble center ; here 
is where agitation begins. Many more operatives leave this mill 
per year than leave Mill A. These workers are suspicious of 
each other's actions, particularly of the foreman's. They feel 
that you are their natural enemy. The foreman himself is a 
grouch. More jarring families, more unkept back yards are 
represented here than in Mill A, and finally the actual efficiency 
of this mill is much less than in Mill A, and the work more 
strenuous." The work is classed as low as 10 per cent, and yet 
the only difference between the two mills is in noise, speed and 
lack of rest. The noise is a mechanical engineer's problem, pos- 
sible of solution. The speed and the fatigue are within the 
owner's control. With these three factors eliminated, the work 
would go up to 70 per cent energizing; as much work would be 
produced under the better conditions, since the force could be 
kept as intact in Mill B as in Mill A. 

Two Doctors of Industry would treat Mill B in opposite ways. 
In order to increase the " production, one would increase speed, 
ignore the noise, study the motions to eliminate waste moments, 
and by the unanswerable argument of figures show you that 
production must go up. This is the headache powder method, 
and leads to a constantly broken, shifting, dissatisfied working 
force. The second Doctor would decrease the speed, cut down 
noise, insist on carefully determined rest periods, and thereby 
maintain a sound organization of skilled workers ; and, what is of 
equal importance, he would raise the general efficiency and hence 
the economic efficiency of the community; nor would he stop at 
that, for he would further strive by known methods to introduce 
additional conditions, so that the work in both mills would be 
brought to about 80 per cent, which would probably be the limit 
for this class of work. 

It should be noted that where the work is done under condi- 
tions which permit the operatives to talk, without interfering 
with their work, the rating is much higher than where such is 
not the case. When we walk, our habit cells control the action, 
but we can walk and think at the same time. This holds, of 
course, in automatic occupations. If the motions are not too 



518 LECTURE NOTES 

rhythmic, both of the hand and the machine, and conversation 
is permitted and encouraged, the work is not nearly so repressive. 
In a certain mill, employing girls at strictly automatic work, the 
employees were placed facing one way, so that one operative 
looked upon the back of another; between adjacent operatives 
was a small partition. This mill had to replenish its entire force 
each year, until the scheme was changed to a round table plan, 
which encouraged conversation. After this, the losses were 
normal. 

An interesting case of shop psychology is the following : In a 
certain, piano factory, a number of girls were employed to 
assemble the mechanism which transmits action to the strings 
when the key is struck. Each girl attached a piece with a limited 
number of motions, and was paid on the piece-work plan. These 
employees were the most discontented in the firm, and were con- 
stantly shifting to other occupations. Various means — such as 
rest rooms and decorated surroundings were tried without 
success. As a last resort, the foreman got a fine, big, maltese cat 
and placed it in the room one morning, before the girls arrived. 
This solved the trouble completely. The cat compelled rest 
periods, for every now and then it would jump into a girl's lap 
and take her attention from her work for a few moments, and in 
this way relieved the tension of the high speed and permitted the 
elimination of fatigue poisons at irregular but sufficiently fre- 
quent intervals. Every girl planned at home to bring something 
in her lunch basket for the cat to eat, whereas attempts to get 
them interested in the decorating of rooms failed. When girls 
left this firm and went elsewhere, where there was no cat, they 
quickly returned. Production increased and peace reigned. The 
commercializing of a woman's home, instinct for a cat, probably 
energized the work 10 per cent. It was found also that the intro- 
duction of the cat began to arouse an interest in the other better- 
ment plans, which had originally failed. This particular case is 
worthy of a very careful psychological analysis.* 

* It should be noted that the superintendent surreptitiously put the cat in the room 
one morning before the girls came to work. This provided the essential element of 
discovery and therefore of possession. If the girls ever go on a strike they will take the 
cat along. It is their cat. How would the average betterment-expert have handled 
this? 



AN ANALYSIS OF WORK 519 

The details just stated are cited not so much to show specific 
methods of procedure as to emphasize the basic fact that we are, 
individually and collectively, — human units, towns, states and as 
a nation, — what our work makes us. 

We have just pulled out of a thousand-year swamp up to 
firmer ground, and whether we go higher or begin to slide back 
depends upon how energizing our work is. 

It is fundamental that mankind must do stimulating work or 
retrogress. This is the bed-rock upon which our constructive 
programs of education, industry, sociology — of living, must rest. 

Fortunately we are now far enough away from the thousand- 
year swamp so that one may safely propose as a thesis, that only 
that civilization will prevail whose laws and life conform most 
nearly to Natural Law. The Spirit of Unrest, whether it be evi- 
denced by the spontaneous and seemingly unaccountable strike of 
automatic workers, the questioning introspection of university 
faculties, the open defiance of law, or the cry for the Doctor of 
Industry, is the headache giving warning of deeper seated organic 
trouble. 

The worth of our education, our laws, our scientific manage- 
ment, will be determined by the extent to which they will make 
clear, conform with and supplement the laws of work. Their test 
will lie in the degree to which they are useful in leading us safely 
forward to better, brighter conditions of work, and their basic 
idea must be service to the mass. 

I like to think we are coming to a time when the great march 
forward of civilization will not be largely a matter of chance, with 
the blind often leading the blind, but more an organized orderly 
movement in conformity to the Laws of Nature. In that day the 
opportunist will not vault into the saddle of leadership when 
humanity, having been badly led, cries out for a leader ; instead, 
he will be a part of history with the medicine man of the savage, 
for at the bottom both of these in their creation and in their 
haphazard panaceas are the same. On the contrary, humanity will 
send out a well-trained, well-equipped vanguard of research men 
— physicists, bacteriologists, chemists, psychologists, biologists, 
economists — to explore beyond the ranges of the known ; it will 



520 LECTURE NOTES 

send its historians back over the line of march to learn the lessons 
of past successes and failures ; it will establish outposts where the 
facts uncovered will be formulated into laws ; and from the out- 
posts to the last mite of humanity will be an established way for 
the application of the law to the need. 



WHAT IS A BANK? 

By 
Frank A. Vanderlip 

The importance of the part played by the banking business in 
the modern industrial and commercial system is so obvious that 
it cannot be doubted even where it is but imperfectly under- 
stood. Its relations to a highly specialized society are analogous 
to those of the vital organs to the human body; when its func- 
tions are interrupted there is paralysis throughout the system. 

The lower forms of life are so simple that you may cut 
through them and subdivide them at will without any impair- 
ment of vitality, but as organization develops, with a circulatory 
system and coordinate functions for the several parts, this inde- 
pendence of the parts is lost. And so in a primitive society the 
individual is comparatively independent, but as organization takes 
place and specialization proceeds and the exchanges of civilized 
life develop, the well-being of the individual becomes more and 
more dependent upon the perfection and regularity and stability 
of the system by which the exchanges are made; and banking, 
through its various functions, is the most important agency to 
this end. 

These functions have been developed with the development 
of the exchanges and to provide facilities for handling the 
exchanges. They are a part of the necessary equipment of 
modern society, without which the present volume of trade, the 
existing distribution of population and the prevailing style and 
scale of living would be impossible. Our civilization is based 
upon the division of labor. Its industrial efficiency, its wealth 
of production, its comforts and luxuries and variety of oppor- 
tunity are the results of organized and cooperative effort. If 
each member of the community, instead of supplying all his own 
wants, devotes himself to one thing and all exchange these 
surplus products with each other, the sum total of production 
and of their possessions is increased. By this arrangement 
individual aptitude and talent is encouraged, capital is utilized 



522 LECTURE NOTES 

and the advantages of enlarged and systematic production are 
secured. But economies and improved facilities in the ex- 
changes are as desirable as in production; in fact, the people 
who are engaged in transportation and trade and banking are 
engaged in producing the goods at the place of consumption. 
And the lower you can reduce the cost of making the exchanges 
the nearer you come to endowing each man with the skill of all 
the race and the resources of every land and clime. 

The first important requisite of commercial intercourse was 
a common measure of value. Money was the first great facility 
of trade. Its convenience as a common means of payment was 
great, but the after effects were vastly more important. It 
created a new language, the language of values, which compares 
with barter as speech does with sign language. It made prices 
and markets possible and enormously increased the possibilities of 
trade. Men could understand each other when they talked of 
values in terms of money, and in the precious metals they found a 
common denominator that brought all values into relation with 
each other. 

This use of money as a measure or resolvent of values soon 
extended far beyond its use as mere currency. Grain and cattle 
and cloth and personal services could be valued and compared in 
terms of money and exchanged without any money changing 
hands, or with only the balances paid in money; and this system 
of refined barter has developed until the commerce of the world 
revolves upon the grain of gold as an axis, with almost insigni- 
ficant payments of money. The system was complete when the 
credits arising from the sale of goods were dissociated from the 
goods and became a new and distinct species of property, which 
could be traded in, transferred, merged, or cancelled by cor- 
responding debits. 

The fundamental feature of this system of settlements is the 
fact that in the long run the exchanges settle themselves. All 
sales are made for the purpose of obtaining the means of making 
purchases. Broadly speaking, all income is disbursed, either for 
current expenses or for investments. The wage-earner pays out 
usually a large part of his income for living expenses and the 



WHAT IS A BANK? 523 

rest in payments on a home or to a savings bank. The business 
man disburses his receipts for goods or materials, labor, rents 
and the various costs of doing business, and the surplus to enlarge 
his business or for private expenditure or investment. Every 
item of one man's outgo is an item of another man's income and 
in the aggregate income and outgo must balance, both for indi- 
viduals and communities. A country cannot continually buy 
more than it sells or sell more than it buys unless there are com- 
pensating transactions under other names. It would take the 
entire stock of gold in the United States to pay for the goods 
we import in a single year, if gold was the only means of pay- 
ment; clearly foreigners could not continue year after year to 
sell to us in increasing volume unless they were taking payment 
in commoditi'es which we produce i'n corresponding supply. 
Fluctuations in the movement of commodities between countries 
and localities will naturally occur, resulting from the varying 
yield of the crops and other conditions subject to change, and 
the temporary discrepancies are bridged over with money; but 
the broad fact must be recognized that trade is essentially 
reciprocal, and therefore the credits and debits that arise in the 
exchanges, if they can be brought together, will practically offset 
and settle themselves. 

This task of bringing together the multitudinous transactions 
of the business world, in order that settlements may be effected 
without the risk of robbery and cost of transportation and loss 
of interest attendant upon payments in money, is one of the 
functions of banking, and perhaps the earliest one to be 
developed. Certainly not only the Italian traders of the Middle 
Ages but the Romans before the Christian Era were familiar 
with the bill of exchange, for when Cicero was about to send 
his son to school at Athens he wrote to inquire "whether he can 
take a Bill for the money he will want in Athens, or whether he 
must take the money itself with him." This indicates that the 
settlements between distant cities were handled substantially then 
as now, by a system of book entries and offsets, if not through 
banks like ours, through regular dealers in exchange. 

If a man in Athens had a payment to make to a resident of 



524 LECTURE NOTES 

Rome and at the same time had a like payment coming to him- 
self from another resident of Rome, obviously the simplest way 
to accomplish both settlements would be to have his Roman 
debtor pay his Roman creditor and send the receipt to Athens. 
Or if he had numerous dealings in Rome he might empower one 
agent to collect all that was coming to him and pay all that he 
was owing. But one man might not have both credit and debit 
transactions with different people in a distant city; he might, like 
Cicero, be only a buyer, or he might be only a seller in that mar- 
ket; and so the exchange dealer was developed as the agency for 
bringing the debits and credits together. It is safe to say that on 
the very day that Cicero bought his bill on Athens some Athenian 
was buying a like bill on Rome, and when the two instruments 
reached their destinations they balanced and cancelled each other. 
Moreover, if Athens wanted to pay Alexandria, or Damascus 
wanted to pay Corinth, it is likely that a bill on Rome was the 
medium, for it is easy to conceive that Rome in those days must 
have been the clearing-house of the world and that a credit there 
would be good anywhere. 

It doesn't take a mercantile community long to understand 
facilities like these. It is probable that mercantile houses in the 
regular trade were the first to buy and sell credits in distant 
cities, but as the exchanges multiplied the traffic would 
naturally centralize in the hands of exclusive dealers, and the 
more so as the element of time became increasingly important 
and called for the employment of large capital. When Cicero 
bought his bill on Athens the exchange dealer sold his own 
credit for cash, but a Roman merchant forwarding a bill of 
goods to Athens might prefer to sell his prospective credit for 
cash, in which case the exchange dealer would be buyer and have 
the credit to carry to maturity. This, as a matter of fact, is the 
common form of foreign exchange transactions, and it includes 
a larger service than the mere settlement of maturing credits. 
The exchange dealer has bought the account, and the shipper, 
instead of awaiting the delivery of the goods and the arrival of 
the remittance, comes into immediate possession of the proceeds 
and can turn them back into his business. Evidently a new and 



WHAT IS A BANK? 525 

useful subdivision is here established in the circle of exchanges. 
The manufacturer or merchant, having effected the sale and con- 
verted his goods into a credit in terms of money, is at the end of 
his function, and the sooner his capital is released from that tran- 
saction and returned to the field in which he is a specialist the 
better. The dealer in credits, or banker, whose specialty it is to 
arrange the liquidation of such credits, bringing them together 
by corresponding dates and places, now steps in and for a small 
consideration carries them to maturity and makes the collection. 

The advantages of settling the credits and debits of trade by 
this arrangement of offsets were doubtless more apparent at 
first where cross-payments were to be made between distant 
localities, but another development was under way which was 
destined to extend the system to include practically all classes 
of payments. That development was the growth of deposit 
banking. This type of banking was also known to the Romans 
in its primitive form, which was simply that of a safe deposit 
business. They had a custom of keeping coin with an agent 
and making payments by personal or written order, but the cus- 
todian had no right to use the funds on his own account. He 
was paid for his care-taking and the advantages to the depositor 
were in safety and convenience. An account which dates from 
1584 of banking in Venice says: "Buyer and seller are satisfied 
in a moment, while the pen moves over the page ; whereas a day 
would not be enough to complete the contract for a great mass 
of merchandise by counting a great number of coins." There is 
plenty of evidence, however, that long before this date private 
bankers in Venice had been receiving deposits and using them 
in private ventures, but with such disastrous results that in 1587 
the State created an institution to take over the banking business 
of Venice and conduct it strictly as the custodian of money con- 
signed to its care. The Bank of Venice made no loans, and 
accepted no deposits but cash. 

The great banks of Amsterdam and Hamburg in the seven- 
teenth and eighteenth centuries were of the same class ; and the 
first deposit-banking in England, that of the goldsmiths, began in 
the same way. They had strong boxes for the protection of 



526 LECTURE NOTES 

their own valuables and consented to receive money for safe- 
keeping on a small charge. As experience showed that in the 
usual course of business withdrawals and deposits offset each 
other it became apparent that a considerable portion of the 
deposits might be loaned and made productive. This is where 
the goldsmith became a banker as we understand the term. 
His relation to the deposits underwent a radical change; instead 
of being the custodian he became the owner. He was in debt 
for them, but they were his, and, subject to the provisions he 
must make for repayment, this hitherto dead capital became 
available for use. From being a mere convenience he became 
an active and independent factor in affairs. 

The change was of tremendous importance. It signified much 
more than the release of a given amount of coin for circulation. 
It created a vast fund of credit which used with moderation and 
understanding had all the potency of the highest form of capital. 
Credit is not a substitute for capital, but it is a most effective 
agency of capital. It is capital's other self, endowed with the 
powers of the principal but possessing an elasticity and mobility 
which the principal does not have. If it has been misused in 
ignorant hands with calamitous results that is no more than 
has happened with all the great forces and influences that con- 
tribute to the progress of the world. 

The banks of the United States hold about $1,500,000,000 of 
money and they have approximately $15,000,000,000 of deposits 
and $12,000,000,000 of loans. If they were doing business under 
the old plan, and could possibly gather up $1,500,000,000 of 
money, that would be exactly the amount of their deposits and 
their loans and discounts could not exceed their capital. It is 
impossible to conceive of the modern industrial and commercial 
organization without the modern system of banking. 

The banker, evolved from the goldsmith, was an intermediate 
species; he was primarily a dealer in money and incidentally a 
dealer in debts and credits. He received for the most part 
money and loaned money, for that was the custom of the time, 
but from him has been evolved the banker who deals primarily 
in debts and credits and only incidentally in money. 



WHAT IS A BANK? 527 

The banker has become the bookkeeper and settling agent of 
the business world. The products of a locality, let us say the 
State of Georgia, move out to the markets of the world and 
create credits in favor of that locality on the books of banking 
institutions in the commercial centers, while at the same time a 
counter movement of commodities is under way from other 
localities into Georgia, in like manner creating credits for those 
localities which are debits against Georgia. The practical effect 
is that the commodities moving between these communities are 
exchanged and pay for themselves, the running accounts being 
kept and settlements effected in the banks. 

To illustrate the details : A dealer in cotton in Atlanta makes 
a sale to a mill in Fall River and receives in payment a cheque 
or draft drawn on a New York bank, which he deposits for the 
credit of his account in an Atlanta bank, and which the latter 
forwards for the credit of its bank account in New York. 
Meanwhile an Atlanta merchant has boug"ht goods in New 
York and in order to pay for them buys from the Atlanta bank 
an order for the New York credit, and this when forwarded 
completes the circle of payments for cotton and goods. 

If we would extend the investigation to include the bank 
accounts of the Fall River mill and the Atlanta dealer we would 
find, first, that the mill account was built up constantly by 
deposits of cheques and drafts received in payment for goods 
sold in all parts of the country and perhaps all over the world, 
with almost no deposits of cash, and that it was drawn down by 
cheques for raw cotton, and supplies and large amounts of cash 
for the pay rolls; second, that the cotton dealer's account was 
built up entirely by deposits of cheques or drafts received for 
cotton shipments and drawn down by cheques and cash payments 
to farmers for cotton. 

For payments at a distance and for large payments every- 
where, bank credit in the form of a cheque or draft is used ; for 
wages, payments to farmers and the retail trade, money is com- 
monly used, but the practice of keeping a bank account and 
making payment by cheque constantly grows and encroaches 
upon the use of money in those fields. Moreover, the "money" 



528 LECTURE NOTES 

of retail transactions is usually only another form of credit — 
bank notes, government paper, or metal coined at an artificial 
value. Money as a mere medium of purchase is no more than 
a token or ticket or order for a certain value ; even gold coin has 
no other significance in such use. We cannot do without gold 
as the measure of values, as the basis of our monetary system 
and as the money of international payments, but it is too costly 
to be used as a common instrument of retail trade. 

During the panic of 1907 an amusing story went the rounds, 
of an Irishman who called at a bank to draw his deposit. The 
cashier offered him a clearing-house cheque and explained that 
it would be accepted everywhere and serve all the purposes of 
money. The Irishman listened attentively and said: "Yes, I 
understand; and if the baby at our house wakes up in the night 
and cries for milk I suppose I am to give him a milk ticket." 
We all laughed at the Irishman's wit, but why? A man doesn't 
want a government note or a gold coin in the same sense that he 
wants food. He wants money for the same reason that he wants 
a milk ticket, as a means of getting something else. 

The money which the banks supply to the Fall River mill and 
Atlanta dealer for pay rolls and cotton purchases quickly finds 
its way into the tills of the town merchants and back into the 
banks to be used over again. If there was only one bank in a 
town and every payment from a car fare up was made by a 
ticket or note transferring credit in that bank, and there were 
no transactions with the outside world, and all tickets or notes 
were deposited at the close of each day, it is evident that the 
condition of the bank would be the same from day to day and 
the business of the community would ''clear" itself. That is a 
microcosmic, though foreshortened, picture of the trade rela- 
tions of the world. 

The banker setting up in business pays in a given amount of 
capital as a guaranty of his own responsibility, establishes his 
connections in the principal commercial centers with which his 
community has relations, and invites customers. He receives 
some idle hoards, some money from customers engaged in the 
retail trade and provides such part of his capital in money as he 



WHAT IS A BANK? 529 

thinks prudent, but the bulk of the deposits that flow over his 
counter consist of instruments of exchange, which make him 
the owner of credits on the books of various other banks far 
and near. He gives the depositors credit on his own books in 
payment and undertakes to place credit at their disposal wherever 
they want it or to pay them the full amount in lawful money on 
demand. The latter is the perilous part of his undertaking, but 
the condition is peremptory. The efficiency and usefulness of a 
banking system depend upon the absolute and certain fulfillment 
of this undertaking to pay cash on demand. A banking system 
must be so organized that its individual members can pay cash, 
i.e., lawful money, on demand, and the public must have con- 
fidence in their ability to do this beyond the possibility of failure, 
or the system is not fit for the vast responsibilities that devolve 
upon it. The task of gathering together the scattered credits 
which are daily assigned to him and of furnishing his customers 
with the credits they want at distant points is not difficult. Of 
one hundred men who come into the bank perhaps fifty will 
want to deposit drafts on distant cities and the other fifty will 
want to buy drafts on the same or other cities ; he sells the 
latter what they want, transfers the deposited credits to meet 
them, and closes the day's business in practically the same con- 
dition as before. 

The foregoing illustrates the movement of the exchanges con- 
stantly proceeding not only between the different communities 
of one country but between the communities of different 
countries. There is a network of relationship between banks 
through which each local community and market is connected 
with all other communities and markets in the world. No locality 
is so remote as to be outside of the circle and no community's 
sales and purchases are so scattered but that they can be brought 
together in the settlements. Each bank is the center of a circle 
of which it is the clearing agent; all payments between its own 
customers may be made by a transfer of credit upon its books. 
If there are two or more banks in a town, all payments between 
their customers are resolved into offsets between these banks, 
and in like manner all payments between localities are resolved 



530 LECTURE NOTES 

into offsets between banks, and if not settled in local centers are 
passed up to larger and larger clearing centers until they reach 
New York for this country or London, the recognized clearing 
center of the world. 

But while the cross-payments of trade may be depended upon 
in the long run to balance and settle themselves, it does not 
follow that they will do so from day to day, or that they coin- 
cide so closely that payments in money are never required. An 
individual's sales and purchases are seldom made at the same 
time, and the sales and purchases of communities are not con- 
stantly balanced. The trade of a one-crop farming district will 
not be so evenly balanced as one of a district in which mixed 
farming prevails, and in every industry there are periods, usually 
recurring every year, when the payments exceed the current 
income, and corresponding periods when income exceeds outgo. 
This means in the case of the individual that at one time he is 
building up his credit balance with his banker and at another 
time drawing it down, and, unless he has more capital in his 
business than he can employ constantly, he will be wanting to 
borrow credit. And so a region like the cotton states, whose 
products move quickly to market, may have large credit balances 
at one season and at another be wanting to borrow. 

In fact, these fluctuations are always occurring and they 
furnish the banker his opportunity for profit. The banker is an 
equalizing agency in the situation. He stands in the breach: he 
must either supply the missing offsets of credit, or, as a last 
resort, make the payments in money. We have seen that if the 
exchanges are running in favor of an individual because he is 
temporarily receiving more than his average of payments he 
will necessarily be piling up a credit balance with his banker, thus 
supplying the latter with lending power to aid some one who is 
a debtor in the exchanges. If a farmer sells his crop and 
receives his year's income at once in shape of a bank credit, he 
has the privilege of drawing upon it until it is exhausted, but 
the fact that he will receive no more for a year practically com- 
pels him to make it last throughout that time. Meanwhile the 
purchasing power of his crop is in the hands of the bank and 



WHAT IS A BANKf 531 

may be loaned under conditions that will secure its return as 
fast as the farmer, or the average of a hundred such depositors, 
will call for it. Evidently the fact that the farmer accepts the 
bank's credit as cash, although he will actually use it in install- 
ments throughout the year, has served to spread the purchase 
and distribution of the crop over the year. And for this use of 
the bank's credit the borrower pays interest. He might have 
made an arrangement to buy the crop of the farmer direct and 
pay in installments, but the farmer prefers a closed transaction 
and a credit in bank subject to cheque. 

Not only has the banker the power to loan the credits which 
his customers have transferred to him, but he has the right to 
create new credits for his customers in exchange for their notes, 
thus expanding the total volume of credit. This power gives an 
elasticity to banking facilities which they would not otherwise 
possess. The only limitation upon this creation of credit, or 
purchasing power, is the ever-present requirement that all cash 
credits must be liquidated in lawful money on demand. This 
possible demand for cash in uncerain amounts is the sword of 
Damocles that hangs over the banker's head. 

The entire system of settlements, with transfers and offsets 
and advances and interchange of capital and credit, is exceed- 
ingly interesting and wonderfully simple and effective, but 
depends for its effectiveness upon a scrupulous observance of the 
principle upon which it is based. That principle is the natural 
reciprocity of trade. If one set of customers are for a time 
receiving payments in excess of the average due them and thus 
piling up balances that may be temporarily used the banker is 
bound to remember that later these customers must receive less 
than their average and will not only need to use the credit that is 
due them but be borrowers in their turn. These inflexible con- 
ditions circumscribe the banker and dictate the character of the 
loans he may make. Credit should never be a substitute for 
capital, at least not in the banking business; it should always 
be the representative of capital and never get far from its 
principal. The credit used in the exchanges should be based 
upon capital employed in the exchanges, with constant liquida- 



532 LECTURE NOTES 

tion and interchange of the two. The idle credit upon the 
books of the bank to-day may be used to move wheat to market 
or to weave cotton into cloth, in confidence that in a few weeks 
or months at the latest this property will be converted back into 
credit and be available for use elsewhere. It cannot be safely 
used for the construction of a building or the purchase of ma- 
chinery, however satisfactory the annual returns from such 
investments may be, because the nature of the property gives 
no assurance as to when the principal will be returned. 

It is not strange that with banking an open and competitive 
business, these essential conditions should not always be observed 
and that occasionally a banker should fail in the supreme test — 
ability to meet all demands in cash. And as credit, with all the 
potency that it borrows from capital, is itself an intangible thing, 
mere opinion, that a whisper may destroy, with the interdepen- 
dence that exists between bankers and between bankers and cus- 
tomers, such failures may easily have far-reaching and dis- 
astrous effects. The very economies of the system, the manner 
in which each man's credit and capital are merged in the common 
fund in order that all our productive powers may be completely 
employed, are responsible for an all-pervading sensitiveness, 
which is the most serious weakness of the system. The moment 
apprehension becomes general the effectiveness of the system is 
destroyed. 

While there are balances from time to time in the exchanges 
between countries, and between different localities of the same 
country, which cannot be settled without shipments of money, 
they are usually met without inconvenience unless there is a 
disturbance of credit. All demands but those arising from alarm 
about credits can be estimated, and credit can be more or less 
used in meeting them, the adjustment in such cases being 
chiefly a question of the price to be paid for whatever accommo- 
dations are wanted. In some instances, however, the facilities 
or restrictions of the banking system in respect to the use of the 
various forms of credit determine whether money must be 
moved or not. 

The movement of the crops each year in the United States 



WHAT IS A BANK? 533 

requires an important movement of money from the centers to 
the agricultural districts, but this is not so much in settlement of 
a trade balance as to provide a medium of making payments to 
farmers. As they adopt the custom of keeping bank accounts 
and giving and receiving cheques this demand for money will 
decline, or if we had a scientific bank note system it could be 
met with that form of bank credit. 

A crop failure may deprive a locality of the usual supply of 
commodities upon which it depends to make good its side of the 
exchanges. Its buying, although possibly restricted, goes on, 
and eventually the balances must be made good by the sale of 
property or the negotiation of outside loans, or the bankers must 
ship out money. A few years ago the southwestern states of 
this country suffered from a severe drought. The crops were 
a partial failure and the usual shipments could not be made. 
Moreover it was necessary to ship grain in to feed the stock on 
the farms. The balances were naturally against the bankers 
of that section. The forehanded farmer who had a credit 
balance at the bank had a right to draw on it to buy grain, and 
it was for the bank to find the means of meeting the draft. It 
could call on the farmers who were its debtors to ship their stock 
or any other movable property to market, or to mortgage their 
farms to outside loan companies if they were not already mort- 
gaged, or it could borrow of an outside correspondent on its 
own credit, or after exhausting its cash reserves it could close 
its doors and wind up business; and all of these things were 
done. Some method by which an outside supply of credit could 
be made available to the local banks would tide such a com- 
munity over its emergency. 

In the several years immediately preceding 1897 the agitation 
over our standard of value created alarm among foreign holders 
of our securities and caused the latter to be sent home in large 
quantities, thus creating adverse balances for us and forcing the 
shipment of gold in settlement. In that case we could not inter- 
pose our credit to stop the drain, for it was the impairment of 
our credit that was causing the movement. 

One of the most notable movements of gold that ever occurred 



534 LECTURE NOTES 

was that from London and the continent of Europe to the 
United States in the last two months of 1907. Conditions in 
Europe throughout the year had been such that the banks were 
reluctant to lose gold, and had raised every possible obstacle to 
its going, but in November a combination of circumstances 
made all opposition useless. The crop movement in the United 
States was on and European buyers wanted the commodities. 
The panic in this country put such pressure on the banks for 
cash that they used pressure to hasten the crop forward; the 
demoralization in trade resulting from the panic was so great 
that importers cancelled many of their foreign orders for goods. 
The security markets of this country were so low that European 
investors improved the opportunity to buy heavily of our stocks ; 
and, finally, the suspension of cash payments created a premium 
upon money which furnished an additional incentive to import 
gold. Altogether the forces were irresistible and over $100,- 
000,000 in gold was transferred to this country. Here again it is 
to be noted that the conditions were abnormal and due primarily 
to a breakdown of credit, and that this breakdown occurred not 
in the countries from which the gold was moving but in the 
country to which it was taken. The operations of our banking 
system were interrupted by panic and the only means of restor- 
ing confidence and order was by the importation of gold. 

It will be seen that practically the only interruptions that 
occur in the regular and satisfactory flow of the exchanges 
through the banks, or to the performance of any of the banking 
functions upon which the business community has learned to 
rely, have been due to apprehensions about the integrity of credit. 
These apprehensions relate at first to only a few banking institu- 
tions but spread until all are directly or indirectly affected, and 
regardless of whether there is basis for suspicions or not. 
Experience has shown that the problem of preventing these dis- 
turbances is largely a question of bringing some higher or better 
known credit to the support of the particular factor which is 
threatened. How this may be effectually done will be con- 
sidered later. 

A simple statement of the functions of banking should be 



WHAT IS A BANK? 535 

sufficient to convince every one that they are useful, legitimate 
and indispensable, and based upon principles fundamentally 
sound. The banking business does not sit at the crossroads 
of the exchanges to take toll by any legerdemain, or by any 
privilege or monopoly, or in any sense as a non-producer. Its 
services are as distinct and creative as those of any industry and 
the benefits are distributed to all the consumers of the com- 
modities handled by the exchanges. It is a business that never 
can be a monopoly, for it controls no natural resource or oppor- 
tunity; its earnings are from current business and its customers 
are alternately debtors and creditors and must be satisfied in both 
relationships or they can easily form new connections. 

The problem of perfecting the banking system to enable these 
functions to be performed with greater economy, efficiency and 
certainty is not a problem of helping bankers but of perfecting 
the organization of society. 



* STORY OF NATIONAL BANKS 

By 
Frank A. Vanderlip 

Two considerations of great importance were named by the 
Secretary of the Treasury, Salmon P. Chase, in his original pro- 
posal for a national banking system, submitted to Congress 
December 9, 1861. One was to provide the country with a 
national currency, secured as to redemption by the bonds of the 
government itself, which would circulate at a uniform value in 
all sections ; the other was to create a new demand for the bonds 
which the necessities of the Civil War were compelling the gov- 
ernment to offer in large amounts, and on which, up to that date, 
the net interest charge was more than 6 per cent per annum. The 
men who designed the national banking system of the United 
States tried to serve two masters. The result has its unfortunate 
side. They tried to serve the people by designing what they 
hoped would be a sound, well-guarded, effective banking system. 
At the same time they tried to serve the government by creating 
a fictitious market for a vast amount of government bonds. It 
may be well within probability that the fundamental errors con- 
tained in the banking act in the half century during which they 
have hampered our domestic development and fettered our 
advance to the position we are entitled to occupy in world finance, 
have cost the people of this country as much in dollars as did 
the war that gave rise to those legislative errors. The cost of a 
bad banking system, in a nation of such vast and active commer- 
cial resources as ours, is really incalculable. We have through 
most of our history grown commercially in spite of bad banking 
laws. Unresponsive and inadequate as our banking act is, it still 
was a great improvement over the bad legislation that had 
created most of the state banking systems in the period of com- 
plicated unsoundness and inadequacy that preceded the enact- 
ment of the national bank act. 

The common currency of the country at that time was state 



STORY OF NATIONAL BANKS 537 

bank notes, the value of which, as the Secretary of the Treasury 
said, was "dependent upon the laws of thirty-six States, and the 
character of some sixteen hundred private corporations." So 
far as the proposal had in view the improvement of banking con- 
ditions it related almost exclusively to regulation of bank note 
currency, and so great was the need for reform in this respect 
that Alphonso Taft of Cincinnati, father of President William 
Howard Taft, writing to Secretary Chase two days after the 
report was published, expressed the opinion that '*if Congress 
would adopt his recommendations for a national currency that in 
itself would be no inconsiderable compensation for the War." 

Prior to the establishment of the national banking system the 
bank note was the most familiar form of bank credit in the United 
States, as it still is in many countries to-day. The first extensive 
use of bank credit everywhere was in the form of circulating 
notes; the chequing account, which has become so common with 
us, being a later development. There were various reasons, in 
the earlier development of banking facilities, why the note should 
be preferred. The individual would find bank notes more gen- 
erally acceptable than his private cheque. The bank's credit was 
more widely known than his own. Comparatively few people had 
bank accounts and people preferred to receive payment in some- 
thing that could be paid out directly without inconvenience. The 
bank note was a means of extending the use of bank credit to a 
large class of people who otherwise would not employ it at all. 
A bank accepted the note of a customer, with such security as it 
might exact, and gave in return its own notes payable in coin on 
demand and printed in denominations convenient for use as 
money. The borrower made his payments with these and the 
recipient, instead of presenting them for redemption, likewise paid 
them out as money, and so they were passed on from hand to 
hand as a substitute for coin. Upon a given amount of coin 
reserves it was possible to keep in circulation a much larger 
amount of notes. The excess represented bank credit doing the 
work of capital. 

It is significant of banking practice at the time the Bank of 
England was founded that its promoters thought they had secured 



/ 



538 LECTURE NOTES 

a practical monopoly of the business by a provision in the charter 
which forbade any other company of six members or more to 
issue promissory notes payable on demand. It was not until 1833 
that the first corporation was organized in England to do a deposit 
and discount business without the currency accompaniment. Up 
to that time it had not appeared practicable to use cheques instead 
of bank notes in common transactions. It was the restriction 
placed upon note issues in England in 1844 and in this country by 
the National Bank Act which developed the use of the cheque in 
these countries so far beyond its use elsewhere. In France, Ger- 
many, and the other countries of Europe, to the present time, the 
bank note is still the popular medium of payment. 

The National Bank Act, as we shall see, effected a radical 
change in the character of the bank note. The currency privilege 
had been so abominably abused under many of the old state bank 
systems that the true function of a bank currency has been almost 
totally obscured in this country. The bank note in its ideal capac- 
ity belongs in a class with the bank cheque and the bank draft, 
as a free, unfettered instrument for transferring bank credit. The 
National Bank Act put it practically in a class with the govern- 
ment note, as a fixed form of currency. In doing that there was 
a fundamental failure to grasp the true function of the bank note. 

The bank note is the natural complement of the cheque in 
deposit banking. It enables a bank or banking system readily 
to convert deposits into circulating notes, and thus furnish the 
community with currency by simply changing the form of its 
obligations, and in perfect response to the community's needs. 
Let us take for an illustration the case of a manufacturer, who 
sells his goods at wholesale and receives practically his entire 
income in cheques and drafts, for which he receives credit in his 
bank account. He pays for his supplies usually by drawing 
cheques on that account. But when it comes to his pay roll that 
method is not satisfactory because the wage-earner objects to 
taking the time and trouble during banking hours to get these 
cheques cashed. The employer accordingly calls upon the banker 
for money for the pay rolls. He draws a cheque for the full 
amount and the banker, if permitted by law to do so, would 



STORY OF NATIONAL BANKS 539 

supply the sum in the bank's own notes. This simply changes 
the form of the bank's obligation from a deposit promise to a 
note promise. The wage-earners receive these notes, pay them 
out to merchants, landlords and others, with net result that, 
within a few days, most of them reappear at the bank as 
deposits. The bank is now in the position it was before the 
notes were issued except that a certain amount of credit has 
been transferred from the manufacturer's account to the 
accounts of sundry other depositors. In no other conceivable 
way can this class of payments be so easily and economically 
handled. They are typical of local payments generally. The 
notes represent no investment while they are idle in the banker's 
safe. While they are outstanding adequate reserve of coin is 
kept against them. The instant they return to the bank they 
cease to be a charge. 

Compare this with the use of gold coin for the pay rolls; the 
coin makes the same rounds and renders no better service. But, 
at every stage of its existence, whether in a banker's vault or in 
circulation, coin represents an investment at its face value. The 
interest on that investment is a constant charge on the exchanges. 

It is evident also that there is a perfect adjustment of the 
volume of such a bank currency to the calls of the community 
for cash. 

The notes are interchangeable with the deposit credits in any 
amount without disturbance. The public is able to use personal 
cheques, bank currency or bank drafts, as best suits the kind of 
payments to be made. The three forms of bank credit cover 
every variety of payment in domestic trade. They are all of the 
same species and together make a complete set of instruments 
for the transfer of credit, in a system the essential principle of 
which is that such credits, when brought together in the clearing 
houses, will balance and settle themselves. 

Experience has shown, however, that while a bank's liability is 
the same whether a customer takes his credit in the form of a 
deposit subject to cheque or in the bank's own circulating notes, 
there is more danger of abuse in the latter method of creating 
credit than in the former. The reason is that the note liability is 



540 LECTURE NOTES 

somewhat obscured by the use of the notes as a common cur- 
rency ; the notes are scattered far and wide, often by design, and 
nobody is sufficiently interested in sending them home for re- 
demption to make that an effective check upon overissues. On 
the other hand, a cheque drawn upon a deposit account, appears 
immediately at the counter of the bank and, if not completely 
effective in preventing undue expansion, is an influence to that 
end. 

The world's experience with bank currency, therefore, while 
demonstrating that it has a function in the exchanges that no other 
form of credit, not even standard money, can perform, has caused 
nearly all countries to place restrictions upon it. In most of them 
the power of issue is now confined to a single institution and 
exercised under close governmental supervision, this institu- 
tion being charged with the responsibility of maintaining an ade- 
quate gold reserve and supplying all the banks with currency as 
they need it. The elasticity of the currency is thus in a large 
degree preserved while effective safeguards are placed about its 
issue. 

The movement in the United States to restrict and control bank 
currency was a part of a world-wide movement. But in this 
country the resulting system was shaped by influences that did 
not exist elsewhere. The purposes held by the founders of the 
national banking system were realized. It created a market for 
large amounts of government bonds and eventually made possible 
a reduction of the interest on the public debt to the lowest rate 
ever reached in any country upon any class of securities. It gave 
us a truly national currency, every note good without question or 
discount in every part of the country. These were very great and 
perfectly obvious benefits. The superiority of the new currency 
was especially appreciated by the public, for the defects of the old 
system were a daily vexation to everybody. Naturally the national 
system, compared with what had preceded it, became firmly 
established in the confidence of the country. 

Now, of course it is of the first importance that a currency 
shall be safe. But it is of scarcely less importance that it shall 
be efficient for the particular service it is expected to perform. 



STORY OF NATIONAL BANKS 541 

The trouble with the national banking system is that its authors 
were so intent upon other aims that they lost sight of the essen- 
tial function of a bank currency, which is to supply an elastic 
element in the monetary stock. 

The fundamental question in dealing with currency is whether 
or not there is any natural relation between currency and bank- 
ing. One of the results of the movement to restrict bank issues 
was the development of a considerable body of opinion in support 
of the idea that banking should be confined strictly to receiving 
deposits and making loans; that it should have nothing to do 
with issuing currency. In England this view became strong 
enough to change the constitution of the Bank of England, but 
its advocates there contended only that the banks should do 
business with gold or notes that represented an equal amount of 
gold. In this country the idea was greatly encouraged by the 
issue of United States notes in the form of currency. In the 
light of this example there developed a party which argued that 
the issue of money, or anything that had the semblance of money, 
was an act of sovereignty; that government notes should take 
the place of all bank notes. One of the most distinguished oppo- 
nents of a bank note currency responding to an opinion that the 
government should retire the legal tender notes and "get out of 
the banking business," epitomized the opposition by retorting that 
the banks should retire their currency notes and "get out of the 
government business." Here then is the vital and debatable 
point in the currency discussion. Is there such a necessary rela- 
tionship or mutual interdependence between the functions of 
banking and the functions of a currency system that the two sets 
of functions must be coordinated in order that either may be 
successfully performed? That is precisely the contention of 
those who believe in an elastic bank currency. 

There is no real issue over the question of "sovereignty" in 
this connection. Unquestionably the government must fix the 
standard of value and determine what shall be legal tender, and 
nothing else is real money. 

It is agreed also that the government should regulate and 
supervise all forms of private or corporate credit designed for 



542 LECTURE NOTES 

use as currency, in order to enforce its redemption in gold on 
demand. Here, however, we approach the Hmits, not perhaps of 
the government's authority, but certainly of its ability to perform 
the function of supplying currency in the volume, at the time, 
and in the place, required by the changing conditions that affect 
the business world. 

Neither the government officials who come and go at Washing- 
ton, nor any other authority, can determine in advance how much 
currency will be required from time to time. Nobody knows 
how much currency the people of this country will call for next 
year or even next month. Nobody can tell within hundreds of 
millions of dollars what the crops of the country will be worth, or 
what the volume of trade will be next year, or how much of that 
business will be handled by means of cheques and drafts and how 
much will require currency ; nor can any one tell what part of the 
$16,000,000,000 of bank deposits in the United States may be 
called for in cash at any time. All of these demands are un- 
certain and fluctuating. They are directed, not to the govern- 
ment, not to the offices of the treasury, but to the banks. Not 
until the government receives deposits and makes loans and 
enters upon all the functions of banking, will it be in position 
to measure the demand for currency or to supply it direct. 
Until then, wherever the authority for issue may be lodged, all 
supplies must reach the public through the banks. 

On the other hand, the banks are expected to supply currency 
to meet all the fluctuating demands of trade. They are required 
to pay lawful money or a currency acceptable in its stead for all 
their deposit liabilities on demand, or confess insolvency. Is 
there no relationship between this obligation and the function 
which would enable them to meet it ? 

The volume of currency cannot be responsive to the needs of 
trade unless it may be based upon the credit of the traders who 
use it, backed, of course, by the commodities which are moving. 
If wanted to move grain it must be based upon the credit of the 
dealer and the value of the grain, and if wanted for merchants 
or manufacturers it must be based upon their credit and their 
goods and materials in stock. Neither a grain dealer nor mer- 



STORY OF NATIONAL BANKS 543 

chant can give government bonds as security unless he is some- 
thing more than a grain dealer or merchant ; nor can the banker 
who supplies him with credit give bonds as security unless he is 
something more than a banker. The banker has no security to 
offer except what he receives from his customers, and there can 
be no elasticity in the currency, or certainty that a banking system 
will meet its obligations, or sure basis for public confidence in 
time of strain, unless currency can be created upon banking assets. 

The requirement that national bank notes shall be secured by 
government bonds takes them out of the class of responsive 
currencies. The volume of these notes is determined by condi- 
tions utterly foreign to the conditions of trade. There is no 
connection or relationship between the amount of currency a 
country needs and the amount of its public debt. It has fre- 
quently happened that a period of national prosperity and large 
revenues has caused a reduction of the public debt at the very 
time when a larger volume of currency was required. On the 
other hand, a great war might cause an increase in the debt that 
would make the currency privilege a menace to our monetary 
system. 

This arbitrary restriction upon bank currency has compelled 
the banks of this country to do business without any element in 
the monetary stock that was readily adaptable to the varying 
demands upon them for currency. The trade of the country 
fluctuates from time to time, reaching its greatest activity each 
year during the autumn months. The principal crops are then 
being moved to market; farmers demand cash, particularly in 
the case of cotton, which moves rapidly. Large sums of cur- 
rency, therefore, must be withdrawn from the banks of the 
central cities. It is a matter of indifference to the farmer 
whether the currency he needs in the crop moving operation is in 
the form of a secure bank note or in money that might be the 
basis of a bank's cash reserve. But it is a matter of the most vital 
importance to the community served by the bank whether or not it 
can perform this service by parting with its credit or whether it 
must invade its cash reserves and consequently shrink the whole 
credit structure which stands on that stock of reserve money. 



544 . LECTURE NOTES 

The fall of the year is the period of heaviest retail trade. The 
money withdrawn from the banks passes to the farmers and 
thence from hand to hand discharging local obligations, eventu- 
ally reaching the local banks and ultimately finding its way back 
to the centers after the holidays. Clearly the country needs a 
great deal more money during the fall months than at any other 
season, but the supply does not adjust itself to this condition 
unless the pressure is great enough to force the importation of 
gold. 

There are several reasons why gold does not move readily 
enough to supply the desired elasticity in our monetary stock. 
In the first place, our command over gold depends upon numerous 
conditions that are beyond our control, such as the balance of 
trade, movement of securities, state of foreign trade and markets, 
and the attitude of foreign bankers. The season of active trade 
with us coincides closely with the season of activity in Europe, so 
that we want more money at the same time they do. Furthermore, 
if we want it because financial conditions are threatening, the 
markets of the world are now so closely related that the foreign 
banker will cling to it for the same reason. When in 1907 we 
finally broke down all barriers and drew away from Europe 
heavy supplies of gold, great sacrifices were necessary to accom- 
plish it. Finally, the cost of transporting gold across the ocean 
and back again in a few weeks, with the loss of interest while in 
transit, is a heavy charge for a temporary use. The result of 
these conditions is that this country usually experiences a sharp 
stringency in the autumn months. Neither money nor credit is 
available to handle the business of the country to the best advan- 
tage. The banks encroach upon their reserves, advance the 
interest rate to discourage the demand for loans and curtail 
accommodations as closely as possible. The business public 
neglects cash discounts, puts creditors off with promises and 
adjusts itself as best it can to a situation which always involves 
more or less stress, sacrifice and danger. 

It is often said in criticism of the bankers that as these condi- 
tions are repeated annually they should provide for them by enter- 
ing the active season with larger reserves. The individual banker, 



STORY OF NATIONAL BANKS 545 

however, has but little influence upon the situation. He is con- 
trolled by competitive conditions. There can be no unity of pur- 
pose or common policy as the system is now constituted. More- 
over, there is something obviously wrong in the proposal that large 
sums of capital shall be kept idle during eight months of the year 
in order that they may be used as common retail currency during 
the other four months. If the large transactions of the business 
world are settled with bank credit it ought to be possible to finance 
the local trade without passing gold from hand to hand. 

But the climax of the system's incapacity and helplessness is 
seen in the recurring periods of panic when practically the entire 
banking service of the country confesses its inability to meet the 
universal test of bank solvency, to wit: the payment of cash on 
demand. 

Although panics never disturb the credit of national bank notes 
the national banking system has not been able to protect itself, or 
the public against these disasters. Its $700,000,000 of outstand- 
ing notes are secured but its $7,000,000,000 of deposits, practically 
all payable on demand, are not only unsecured, they are unsup- 
ported by any system providing for their ready liquidation. The 
wisdom of the ostrich which sticks its head in the sand at the 
approach of danger has its parallel in the fancied security of the 
national banking system because its notes are protected. 

Even this statement does not disclose the entire situation. In 
addition to the $7,000,000,000 of deposits in national banks there 
are $9,000,000,000 of deposits in banks operating under state 
charters. That means, in all, approximately $16,000,000,000 of 
bank credit dependent upon the responsibility of 23,000 banks 
(scattered over fifty-one States and Territories) and upon popular 
confidence in their individual ability to pay cash on demand. 
Clearly there is no lack of material for panics to work on, 
although the national bank notes are secured. When in addition 
it is remembered that the total amount of cash, held by the banks 
against these deposits, is less than $1,500,000,000, and that the 
total stock of money in the United States is estimated at less than 
$3,500,000,000, half of it being gold, there is no mystery about 
why we have bank panics while other countries do not. In all 



546 LECTURE NOTES 

other countries the banks have the power to use their ordinary 
assets as a basis for currency. Even the Bank of England, not- 
withstanding the Peel Act, in an emergency is allowed to do 
this. It has repeatedly suspended the bank charter to do it, and 
the assurance that it will do so, when necessary, is as effective 
as a statute. 

A simple statement of these facts is sufficient to expose the 
weakness of our banking situation. Public confidence, to be as 
stable and unquestioning as it is abroad, must have the same basis 
it has there, to wit : a knowledge that the banks are equipped 
to meet any demands that may possibly come upon them. It is 
common knowledge that our banks are not. They have no means 
of defending themselves or of demonstrating their solvency. 

The inherent weakness of the banking situation in this country 
lies in the fact that it includes so many — 23,000 or more — inde- 
pendent and unrelated institutions competing actively with each 
other and, except for the degree of unlegalized cooperation 
developed in the Clearing House Associations, without any 
coherent organization or leadership. It is apparent that the situa- 
tion is radically different with regard to the practicability of 
voluntary cooperation and mutual support than it is, for example, 
in the British Isles, where there are less than 200 banking cor- 
porations with over 8,000 branch offices. It is probably true that 
our numerous banks, owned and managed in the communities 
where they are located, are less rigid in their rules of business 
and more responsive to local wants than the branch offices of 
large outside corporations would be. On the other hand, there is 
the danger that this responsiveness everywhere to local conditions 
may be without proper regard for general conditions, which may 
be all important ; that the banking situation as a whole suffers for 
want of the larger view. It is also true that with so many indi- 
vidual units in the system there cannot possibly be as high an 
average of experience and ability in the management as will be 
found, for example, in the twenty-nine banking corporations of 
Canada. 

This system of independent local banks has its advantages and 
is undoubtedly permanent in the United States. But without 



STORY OF NATIONAL BANKS 547 

some organized means of cooperation and mutual support these 
isolated institutions are not only helpless in time of danger, they 
are a menace to each other. Some of them are certain to be 
imprudently or dishonestly managed and, under pressure, will 
succumb. 

Every failure at a time when credit is known to be under 
strain creates more distrust. The pressure upon others, unpre- 
pared to bear it, increases. The alarm heightens and spreads 
until the entire system is prostrate. 

But the most disastrous effects and the most striking evidence 
of the constitutional weakness of the system are seen in the 
struggles of the individual banks to protect themselves at the 
expense of each other in every emergency when their strength 
should be united. The banks lead in a scramble for cash which 
cannot possibly strengthen the situation as a whole. In fact, it 
actually hurries on the crisis. At the very time when it is of 
the highest importance to support credit individual bankers 
curtail credit by the most drastic methods. And just when it is 
of the highest importance that the limited supply of money shall 
circulate with the greatest possible rapidity they seize every 
dollar within reach and lock it up. In short, the efforts which 
each bank will naturally make for self -protection in time of panic, 
and for the most of them the only efforts they can make, are 
such as must intensify the general alarm. 

A banking system should be a source of strength and support 
to the business community in times of financial strain. It is a 
recognized principle of banking that in a time of panic, when 
credit throughout the community is shaken, the banks should 
show the utmost liberality in extending credit to all who are 
entitled to have it. There is no limit to which demoralization 
may not go in the excitement of general alarm, unless solvent 
houses may obtain their usual accommodations. On the other 
hand, the steadying influence in every crisis is the buying power 
of people who have credit in reserve and are influenced by the 
unusual conditions to come into the market and use it. The 
banking system is the organization through which these reserve 
powers are exercised. When that organization breaks down or 



548 LECTURE NOTES 

refuses to perform its usual function demoralization is complete. 
Nothing could be more unfortunate when alarm prevails and re- 
action is under way than for the banks to be forcing the collection 
of loans in order to make a showing of individual strength or for 
the purpose of liquidating deposits. There should be some other 
means of satisfying the anxieties of depositors than by prostrat- 
ing the business community to do it. 

We have seen that bank credit is a factor of constantly in- 
creasing importance in the business world. The necessity for a 
metallic basis for that credit is not in dispute, but the credit 
transfers through the Clearing Houses of 100 cities in 1910 were 
one hundred times the total stock of gold in the country. The 
trade of the world is settled through the banks in reliance upon 
their solvency; industry and commerce are financed upon bank 
credit to such an extent that the orderly course of business is 
dependent upon its stability. Always excepting the integrity of 
the standard of value itself, there is nothing so vital to the busi- 
ness community as that this vast fabric of credit shall be properly 
supported. 

The importance of protecting bank credit in the form of bank 
notes has long been recognized, but in the development of banking 
in the United States since the national system was established, the 
book liabilities of the banks, from being less than the note liabil- 
ities, have become twenty times the note liabilities. It used to 
be argued that bank notes were a form of credit which should 
be especially guarded because they were a common currency and 
the means by which wages were paid. Without qualifying in the 
slightest the demand for a safe currency it should be added that 
there is no darker day for the wage-earner than when the banks 
suspend the payment of deposits and begin a hurried collection 
of loans. The amount of currency he has in his pocket is not 
more important to him than regular employment. A persistent 
demand for the withdrawal of deposits in cash means that the 
entire system by which industry and commerce is supported is 
going to pieces. 

It is a fundamental condition of banking that a bank shall pay 
cash on demand. It is this condition that makes bank credit the 



STORY OF NATIONAL BANKS 549 

highest and most available form of credit. If a single bank fails 
to meet this test its doors close in ruin and disgrace. Yet the 
entire banking system of this country may be forced to suspend 
payment, with inestimable confusion and injury to all business 
interests, because no system exists for creating an acceptable cur- 
rency upon bank assets. 

It is not to be supposed that the country will go back to un- 
restricted note issues based upon the individual responsibility of 
23,000 or even 7,000 banks; it is impossible for such a division 
of responsibility to command unwavering confidence. But 
nobody ever believes that any considerable proportion of these 
banks are insolvent and it is safe to say that to whatever extent 
they pledge their credit together it will be unquestioned. The 
problem of banking reform is to provide a higher form of credit 
that can be quickly substituted for any particular credit that is 
threatened. The highest possible form of credit, readily available 
in any sum required, is a bank note currency based upon the 
united assets of a national system. When each individual bank 
in the system can depend upon securing currency of this kind, 
to the extent of its own approved assets, bank credit in the 
United States will be safe from any general panic. 



^SAFEGUARDS AGAINST PANICS 



By 
Frank A. Vanderlip 

The panic of 1907 afforded a convincing demonstration of the 
inherent weakness of the banking organization in the United 
States, and awakened for the first time a general interest in 
proposals for currency reform. The panic of 1893 had occa- 
sioned some agitation of the subject and the American Bankers' 
Association, meeting at Baltimore in 1894, adopted recommenda- 
tions looking to a more liberal system of bank issues. What was 
known as the Baltimore plan contemplated issues by all the 
national banks against their general assets instead of against 
government bonds or other specified security. In all the later 
discussion of the subject this class of issues has been known as 
"asset currency." The silver agitation which came about that 
time postponed the bank note question and little progress was 
made for ten years more. 

In 1906 the American Bankers' Association appointed a com- 
mission to deal with the subject and in 1907 it ratified the action 
of the commission, which favored issues by all the national banks 
upon general assets. At that time, however, it was apparent that 
strong opposition existed among bankers as well as in Congress 
to a system of unsecured issues by thousands of institutions. 

At this stage of the agitation came the panic of 1907. To the 
average business man it was like a bolt of lightning from a clear 
sky. The country was prosperous, crops were good, industries 
were busy and trade was in a healthy and well-balanced condition. 
That credits were not generally over-extended was proven by the 
comparatively small number of failures, despite the tremendous 
shock and strain of the panic. The crisis came at the season of 
the year when the legitimate demands for money and credit were 
at the highest. Conditions abroad were unfavorable to the impor- 
tation of gold and, with no facilities at their command for increas- 



SAFEGUARDS AGAINST PANICS 551 

ing the supply of currency, the banks of the central reserve cities 
were unavoidably below their legal reserves of cash and in no 
position to withstand additional and extraordinary demands. 

Up to this time the situation, although strained, was not excep- 
tional for that season of the year, and what followed in 1907 
might as well have occurred in 1906 or 1905 or at any time when 
the banking resources of the country were fully employed. As 
it happened at this critical juncture in 1907, events transpired 
which created a "run" upon certain banking institutions in New 
York City, and the newspaper reports of this started a general 
movement by banks in the interior to withdraw funds from 
New York, partly to strengthen their own cash holdings and 
partly no doubt in anticipation of what actually followed, to wit : 
the restrictions of cash shipments by the New York banks. 

With no means at their command for converting their assets 
into currency, and facing a demand of immeasurable propor- 
tions, the banks of New York City were obliged as a choice of 
evils to place restrictions upon cash payments; the banks of the 
other central reserve and reserve cities found it immediately 
necessary to do the same, and the country banks generally felt 
compelled to follow their example. It is unnecessary to dwell 
here upon the enormous cost to the country of the industrial 
disorganization which followed. 

Confronted by this emergency and facing the necessity of 
satisfying by some means the calls of the public for a circulating 
medium, the banks acting together through the clearing houses 
and other similar organizations, proceeded to improvise an 
emergency currency, acceptable for local use. The public with 
a most creditable appreciation of the situation, accepted these 
makeshifts as unavoidable ; confidence in the banks was restored 
by their associated action, and gradually normal conditions were 
re-established. 

The lessons of this experience were not lost. A demonstration 
had been afforded, not only of the weakness of our banking 
system while its individual members were isolated and struggling 
against each other, but of its invincible strength when the banks 
united their credit and adopted a common policy. It was quickly 



552 LECTURE NOTES 

recognized that a remedy for banking crises had been found 
without going back to the distrusted system of unsecured indi- 
vidual bank issues. The banks should be organized into an 
effective system and the system equipped with the power and the 
instrumentalities to protect and support its individual members. 

The first expression of this new policy in the form of a statute 
is found in the Aldrich-Vreeland act, a measure avowedly 
temporary in character, but containing the germ of a new system. 
Its leading feature is the provision under which the Comptroller 
of the Currency, with the approval of the Secretary of the Treas- 
ury, may issue currency upon the security of certain bonds, but 
it carries as a subordinate feature a provision by which the banks 
may form local currency associations and these associations may 
receive approved assets from their individual members and issue 
currency upon them. The Aldrich-Vreeland act is a cross-over 
track from the bond-secured currency system of the national 
banking act to a system of currency issues based upon com- 
mercial assets. 

One of the features of the Aldrich-Vreeland act was a provi- 
sion for a Monetary Commission of eighteen members, of whom 
Senator Aldrich and Mr. Vreeland, joint authors of the Aldrich- 
Vreeland act, are influential members. Senator Aldrich as chair- 
man has submitted a tentative draft of a plan which, subject to 
some suggested modifications, has been formally approved by the 
executive council of the American Bankers' Association. 

The first thing to be said of this plan is that it follows, develops 
and legalizes the same general procedure to which the banks 
themselves resorted by common consent in 1907. The clearing- 
house cheques of 1907, notwithstanding the haste and infor- 
mality of issue, proved to be as safe a currency as national bank 
notes, with the advantage of being based upon the natural assets 
of a commercial bank, but they had no legal status or national 
character and could not be used in the settlement of balances 
between localities. 

The Commission's plan, adopting the same principle of issue 
but seeking to unite all of the banks into one system for the exer- 
cise of this function, would provide a national currency under 



SAFEGUARDS AGAINST PANICS 553 

certain definite safeguards which experience has shown should 
always surround issues of paper money. 

It is proposed to form what shall be called the National 
Reserve Association of America, the capital of which shall be 
provided entirely by the banking institutions of this country. No 
other subscriptions will be received and the banks will be allowed 
to subscribe or acquire stock only in a fixed pro rata of their 
capital. The authorized capital of the Reserve Association is to 
be 20 per cent of the capital of all the banks joining it, each bank 
subscribing that percentage of its own capital. In case a bank 
increases or diminishes its capital its shares in the Reserve Asso- 
ciation will be increased or diminished accordingly. One half of 
the subscribed capital will be called in at first, and the remainder 
will probably never be called for, but the subscriptions will stand 
as a liability of the banks and thus serve to fortify the credit and 
prestige of the institution in the eyes of the world. Assuming 
that the banks generally come into it, the National Reserve Asso- 
ciation would be much the strongest organization in the world 
for the performance of banking functions. 

It is proposed to allow the Reserve Association to pay divi- 
dends upon its outstanding shares up to 5 per cent per annum ; 
after which, and after the accumulation of a given surplus, all 
profits are to be turned into the treasury of the United States. 
This disposition of the earnings is consistent with the theory 
upon which the Association is formed, viz., that it is not an 
institution for profit, but an association of , banks for mutual 
support and assistance in their service to their local communities, 
and to enable the banking system as a whole to discharge certain 
public functions which the individual banks cannot so effectively 
perform. 

The organization of the Reserve Association is modeled after 
our federal form of government. It begins at the bottom with 
local bank associations, which must consist of not less than ten 
banks and not less than $5,000,000 of combined capital and 
surplus; then the entire country is divided into fifteen districts 
and the local associations of each district are organized into a 
district association; and finally the National Reserve Associa- 



554 LECTURE NOTES 

tion, with its head office in Washington, is founded upon the 
district associations. The control of the local associations is 
wholly within themselves ; the members elect their own directors 
and the directors for each district are elected by the banks within 
that district, and, finally, all of the districts participate in the 
election of directors for the national association. The plan of 
choosing directors is ingeniously devised throughout to give the 
small banks more influence than they would have if their voting 
power was based upon their holdings of capital stock in the 
Association. In the local associations, for example, three fifths 
of the directors are elected by allowing each bank in the asso- 
ciation one vote regardless of its size, while the other two fifths 
are elected by allowing each bank to cast as many votes as it has 
shares in the Association. A similar plan is followed in electing 
directors of the district and national associations. 

It is interesting in this connection to examine the statistics 
given in the last report of the Comptroller of the Currency as 
to the number and capital of national banks : 

NUMBER. CAPITAL. 

All National Banks 7173 $1,002,735,123 

Under $100,000 capital 4543 183,640,108 

Of $100,000 capital 1247 124,700,000 

Of $500,000 and over $100,000 capital . . 1079 267,525,000 

Total of $500,000 and under .... 6869 $ 575,865,108 

Over $500,000 capital 304 $ 426,870,015 



It is apparent that the great number of small banks would 
give them a predominating influence in choosing a majority of 
the directors. A majority of all the capital of national banks is 
in banks of $500,000 capital and less. If the State banks 
generally come into the system the strength of the small banks 
would be further increased. It is also to be noted in considering 
the relative influence of small and large banks that the latter are 
grouped in a few central cities and that in any possible arrange- 
ment of fifteen districts most of the latter would be controlled by 



SAFEGUARDS AGAINST PANICS 555 

the banks of moderate capital. It would seem to be clear that 
the small and medium sized banks would have ample representa- 
tion in the management of the Reserve Association. 

Provision is made that the district and national boards shall 
each have a number of members chosen from outside of the bank- 
ing business who shall fairly represent the industrial, commercial 
and agricultural interests. 

The national board, which will be composed of forty-five 
members, is to contain six ex-officio members, to wit : The gover- 
nor of the Reserve Association, who shall be chairman of the 
board ; two deputy governors, the Secretary of the Treasury, the 
Secretary of the Department of Commerce and Labor, and the 
Comptroller of the Currency. An executive committee of nine 
members is to have the powers of the full board and of these, 
four, namely, the governor, two deputies, and the Comptroller of 
the Currency, are appointed by the President of the United 
States and serve as representatives of the public. As submitted, 
therefore, the plan contemplates that a very large degree of 
control will be exercised by the Government, that complete pub- 
licity will be given to its affairs and that the institution will be 
essentially a public rather than private one in its character and 
responsibilities. 

This is the general plan of the organization. Now what is the 
organization to do? The chief function entrusted to it is the 
holding of the reserves of the banks, the making of that fund 
mobile, and thus preventing the disastrous scramble for reserves 
by all the banks individually whenever there is financial stress 
Next in importance is the function of issuing the notes of the 
Association for circulation as currency, based in part upon a gold 
reserve and in part upon short-time commercial paper. In other 
words, this organization is to be charged with the responsibility 
of giving elasticity to our currency supply. It will issue its notes 
by re-discounting commercial paper for the banks, and under 
some conditions by making direct loans to the banks upon col- 
lateral security. The note-issuing power is exercised by the 
national association, but through the agency of the fifteen 
branches. It is desirable that these fifteen branches shall be 



556 LECTURE NOTES 

directed by one responsible authority, rather than that they shall 
be in effect fifteen independent institutions. It is fundamental 
that any system of paper currency shall provide for the main- 
tenance of proper relations between the volume of that currency 
and a gold reserve, and the experience of the world has shown 
that this is most certainly accomplished through one central 
authority and by its control over a uniform discount rate. The 
prestige and effectiveness of the gold reserve would be lost if it 
was divided among fifteen institutions ; and the burden of meeting 
all demands would fall directly upon the one reserve at the port 
through which our financial intercourse with foreign countries is 
mainly carried on. It follows that we do not want fifteen new 
kinds of currencies or fifteen separate gold reserves, or fifteen 
sets of managers with conflicting policies and varying discount 
rates. There is the same necessity for a supreme authority in 
control of the national gold reserve as for one authority over all 
the Nation's forces of defense. 

This centralization of authority as to one vital function does 
not, however, mean a centralization of control over banking 
facilities. The banks of all sections of the country will have the 
same freedom of action they have now and will go on making 
their own policies as they have in the past, and the field will be 
open to new competitors as heretofore. Furthermore, the bank- 
ing business will be conducted with a greater sense of security 
and with more regular and stable policies than the individual 
banks have been able to maintain in the past. In brief, all of the 
present banking facilities of the country will remain, enlarged 
and strengthened, but when the powers of the Reserve Associa- 
tion are called upon they will be administered under one con- 
sistent policy, by rules which will make them equally available 
for all applicants. This is accomplished by regulations strictly 
defining the kinds of paper which the Reserve Association may 
receive, and providing that it shall re-discount all the paper of 
certain preferred classes that is offered and at a uniform rate. 

The plan describes four distinct classes of paper which the 
National Association may receive. Two of these are distinctly 
preferred in that they may be received without the endorsement 



SAFEGUARDS AGAINST PANICS 557 

of the local association, but the conditions upon these classes are 
severe. 

First, the Association may re-discount notes and bills of 
exchange that arise out of commercial transactions ; the first con- 
dition being that they shall arise out of commercial transactions. 
The term "commercial transactions" means the class of tran- 
sactions which are incidental to the regular exchanges of the 
country; the movement of the crops to market, the current dis- 
tribution of goods and commodities to supply the consumptive 
demands of the people. This paper must not represent specula- 
tive transactions ; it must not represent investment transactions, 
however conservative. Aside from the question of security, there 
are two reasons why paper representing fixed investments is 
barred ; first, there is no definite limit to the amount of such offer- 
ings and, second, there is no natural or definite maturity for such 
paper. Its payment probably depends upon a speculative or 
investment demand instead of a consumptive demand. It is a 
primary condition of this plan, therefore, that no paper will be 
re-discounted save such as in the ordinary course of trade will 
be naturally liquidated at maturity. 

If a merchant with an established trade and credit, and with 
ample capital for the ordinary requirements of his business, 
borrows at the season of the year when he lays in his heaviest 
stock and regularly pays out later as he reduces his stock; if a 
dealer in grain or produce borrows at the season when the crop 
moves from the producer's hands and pays out as it is distributed 
for consumption; if a manufacturer borrows at one season to 
acquire materials or to accumulate stock for the marketing season 
and pays out regularly at the latter time; these borrowings 
are of the class which are naturally liquidated within a definite 
period. They are the most desirable class of loans for a bank 
to have and the class of transactions from which they arise is the 
one which the community as a whole is most interested in having 
protected from interruptions. On the other hand, if money is 
borrowed to buy land or railway stocks or bonds or to build 
houses, no matter how good these investments may be, such 
borrowings are of another class and are expressly excluded from 



558 LECTURE NOTES 

the privilege of re-discount by the Reserve Association, although 
they may under exceptional conditions be used as the basis of 
advances. 

But the provision that the paper shall arise from commercial 
transactions is not the only restriction upon the first class of 
paper described. This paper must have not more than twenty- 
eight days to run. The effect of this provision is to make the 
applicants send in their short maturities first and keep the Reserve 
Association as liquid as possible. But even this is not all; this 
paper must have been made at least thirty days before it was 
offered to the Association for discount. The effect of this is to 
prevent the manufacture of paper for the occasion; it must be 
paper taken in the regular course of business. And, of course, 
all of this paper must be endorsed by the bank which is offering 
it. 

The other class of paper which may be received by the National 
Association without passing through the local association consists 
of what are known as acceptances. The only acceptances we 
have now are drafts drawn by one business house on another and 
accepted by the latter for payment at a future date ; and we do 
not have many of these because our system of cash discounts 
induces the best houses to pay cash, borrowing if need be from 
their bankers. Abroad it is the common practice for banks to 
accept drafts for their customers, making a small charge, com- 
monly one quarter of one per cent, for the service, after which the 
paper is sold on the market. Furthermore, the popularity of this 
kind of paper abroad has resulted in the development of an inter- 
mediate class of bankers, known as accepting houses, who make 
a specialty of lending their credit by this method. The name of 
an accepting house of known responsibility gives the paper wider 
currency and reduces the discount rate by enough to cover its 
charges. 

It is generally agreed among experienced bankers that nothing 
would do so much to mobilize the credits of this country as the 
introduction of this class of commercial paper. It will do more 
to assure an ample supply of credit for legitimate and current 
business at uniform discount rates for all sections, and more to 



SAFEGUARDS AGAINST PANICS 559 

provide the banks with genuine and high class commercial paper, 
than any other single provision of our banking laws. It will give 
a character and fluidity to local credit that it has never had in 
this country and bring bank credits more generally into conformity 
with certain accepted rules that are difficult of enforcement upon 
paper of purely local circulation. 

All bankers deem it advisable to have in their portfolios con- 
siderable paper originating outside of their depositing patrons, 
because such paper will be paid without requests for renewal, and 
the credit situation the country over would be improved by having 
the percentage of this class of paper increased. The difference in 
rates of discount between paper of this class and that which does 
not have access to the general market would be a constant object 
lesson of the value of compliance with correct banking principles. 

The fact that the National Reserve Association will stand 
ready to take these acceptances and give currency for them will 
give them a broad market and thus help the different sections of 
the country to help each other even more than they are helped 
by the Association direct. The fact deserves to be emphasized 
that this is not centralization ; it is decentralization. The central 
organization by supporting all of the banks of the system will 
impart confidence throughout the system and enable the members 
to deal with each other. Its influence will be against the accumu- 
lation of country bank funds in the centers, so long as any part of 
the country is wanting credit to finance its current business. 

Holdings of either class of paper, which may be re-discounted 
by the Reserve Association direct, will be practically an addition 
to the cash reserves of a bank, and this will furnish a constant 
incentive to the banks and tO' their customers to bring their paper 
to this standard. 

The plan recognizes two additional classes of paper, which may 
be received by the National Association when endorsed by a local 
association. First, it may receive paper arising from commercial 
transactions having more than twenty-eight days, but not more 
than four months, to run. This paper must be passed by the 
officers of the local association to which the applying bank belongs 
and the local association must stand behind it if it defaults ; the 



560 LECTURE NOTES 

members dividing the responsibility on the basis of their capital 
and surplus. 

The local association is authorized to require security, and the 
borrowing bank is required to pay a commission to the local asso- 
ciation which shall be fixed from time to time by the board of 
directors. 

Finally, there is one more class of paper which the National 
Association may discount, but only under unusual conditions. The 
three classes heretofore named must all arise from commercial 
transactions and it is clearly indicated that ordinarily nothing but 
paper directly related to commercial transactions will be received. 
But whenever in the opinion of the governor of the National 
Reserve Association the public interests so require, and such 
opinion is concurred in by the executive committee, and the Secre- 
tary of the Treasury definitely approves, the Association may 
discount the direct obligation of a bank, provided that obligation 
is endorsed by the local association and secured by collateral in 
its hands; but in no case shall the loan exceed two thirds the 
value of the security so deposited. This class of paper is plainly 
intended only for emergency use and the terms of its use are 
such as to preclude offerings under ordinary conditions. 

The objections commonly made to bank note systems are that 
they either permit inflation by having insufficient restrictions, are 
inelastic because of arbitrary restrictions, or suggest monopoly by 
fixing control in a single authority. The last objection is met in 
this proposal by the plan of organization ; it is met again, and the 
other two objections with it, by the regulations covering the classes 
of paper which the Reserve Association may receive. There can 
be no undue inflation of credit so long as its use is confined 
strictly to commercial purposes, nor can there be favoritism if all 
demands for these purposes are met at a uniform discount rate. 

The rate for re-discounts will be the same upon all paper of the 
same class at all offices of the Association and to all applicants, and 
all offerings which comply with the conditions will be accepted. 
If in view of present banking conditions in this country this 
promise seems impossible of fulfillment the answer is that it 



SAFEGUARDS AGAINST PANICS 561 

has been realized for years in practically every other important 
country of the world. 

It has been abundantly demonstrated that the demands upon 
a central re-discounting institution can be controlled by its 
discount rate. The executive committee of the National Reserve 
Association will have the financial situation before it. Its 
members will know the condition of the world's markets; they 
will know whether the foreign exchanges are in our favor or 
against us, whether trade is in normal condition or not, whether 
speculation is prevalent or not, whether the banks are overloaned 
or not, and the committee can act as a governor upon this situa- 
tion by means of the discount rate. Its members will occupy an 
independent position, wholly different from that of bankers who 
are competing for business. They will be acting for all the banks 
and for the entire community. They will not be looking for 
customers; they will not be looking for profits; they will be the 
guardians of the credit situation; they will take all the paper 
offered that complies with the conditions, regulating the rate to 
control the demand. 

It is altogether improbable under the organization proposed 
that the provisions of law governing re-discounts would be 
deliberately or frequently violated. The intent of the restrictions 
is clear and with the publicity that will be given to all the opera- 
tions of the association, the essential regulations could not be 
ignored without exposure. High officials of the government are 
named not only as members of the board of directors but of the 
executive committee, and it is inconceivable that they or the other 
directors, all of whom will presumably be men of character, will 
permit false statements of the association to be made. Respon- 
sibilities quite as grave as these, and far more difficult of admin- 
istration, are already entrusted to public officials and others are 
daily proposed. 

These functions, which it is proposed to have the Reserve Asso- 
ciation perform, are not in themselves new or experimental. 
The form of the organization is new, and planned to avoid any 
radical change in existing banking conditions, and to assure all 
sections of the country of proper representation in the manage- 



562 LECTURE NOTES 

ment. The principle of a central discounting organization upon 
which all other banking institutions may rely, with authority 
to issue currency, has been developed by a process of evolution 
and universally accepted. The ability to control the demand 
by means of the discount rate is fully demonstrated. But in 
adopting this the plan retains what has been the distinctive and 
essential feature of banking in this country, to wit: the inde- 
pendent, local bank, owned and managed in the community where 
it is located. It remains the unit of our banking system and 
the plan is devoted to providing an organization of these units 
so that they may more effectually aid and support each other. 
It aims to accomplish this, moreover, by means which will pre- 
serve the individuality of the unit, and offer an incentive to good 
banking, instead of by placing all banks on a dead level with an 
obligation to support each other regardless of an individual bank's 
character, deserts, or qualifications to conduct a banking busi- 
ness. The weakness of the present system is that no matter how 
carefully a bank may be conducted or how good its assets may 
be, it may be obliged to suspend payments, because conditions 
wholly beyond its control create an unusual demand for cash. 
These conditions may be the result of bad banking by reckless 
competitors. Good banks may be obliged to come to the relief 
of such rivals because to allow them to fail might seriously dis- 
turb financial conditions. Usually such aid only postpones the 
evil day. Under the proposed plan it will be possible for every 
sound bank on the strength of its own assets to obtain at any 
time whatever cash is required to meet its obligations. When 
every good bank has the power to protect itself there will be no 
more panics or fear of panics and every tub will stand on its own 
bottom. 

Vague objections may be raised to centralization of power, but 
there is no escape from the weakness and incapacity of the 
present system without creating power somewhere. The plan 
supplies it by what would seem to be the most unobjectionable 
method it is possible to devise, the use of an agency which the 
banks themselves will control, limited in its functions and subject 
to practically complete supervision by the government. 



SAFEGUARDS AGAINST PANICS 563 

With this organization or one performing substantially these 
functions there is little risk in saying that another suspension of 
cash payments will never be experienced in this country. This 
in itself is of great importance. It would be of inestimable value 
to all classes and all interests to have protection against a repeti- 
tion of the experiences of 1907. But that is not all, or even the 
chief of benefits. Fourteen years intervened between the panic 
of 1893 and 1907, but in every year of that time the facilities 
which the Reserve Association will afford would have been help- 
ful in many parts of the country, particularly in the crop-raising 
season. They will help every community to use the credit which 
it is entitled to use and do it under such restrictions and super- 
vision that the banking business of the whole country will be in 
better condition than it has ever been heretofore. They will 
enlarge the credit facilities of the local banks for all special and 
temporary needs, protect the money markets from extreme fluc- 
tuations, and make credit conditions more stable and uniform 
throughout the country. 

An effort has been made in the preceding addresses to describe 
the functions of banking and the services which the banking busi- 
ness is expected to render in the modern industrial and commer- 
cial system. There can be no adequate comprehension of the 
pressing necessity for banking and currency reform unless these 
functions are understood. Our legislation upon this subject in 
the past has proceeded largely upon the theory that the principal 
function of banking is receiving and lending money, whereas the 
principal function of banking is dealing in credit and the use of 
money is only incidental thereto. Money in all the ordinary uses 
of trade is simply a means of transferring credits or settling 
balances. The great bulk of the business of the world is done 
without it, except as it serves in bank reserves as the touchstone 
of value and as a margin of liquid capital that is quickly transfer- 
able and available anywhere. The essential and fundamental 
truth upon which all business relations are based is the fact that 
the exchanges offset and balance themselves. The bookkeeping 
function, the service of arranging the offsets, disposes of much 
the greater part of all the payments that are to be made. This 



564 LECTURE NOTES 

service is performed by the banks and the fact that so large a 
proportion of the payments can be settled in this manner and 
without the use of money, enables the banks to finance the trade 
of the world so largely upon credit. 

Bank credit is based upon the credit of the business public. 
The banks examine and verify and classify the credit of their 
customers and with a margin for error are able by the law of 
averages to create upon this basis a higher and more liquid form 
of credit which is placed at the service of the business community. 
And as the credit of one bank is usually better than that of its 
individual customers so the credit of a group of banks, by the 
law of averages, is better than that of an individual member of 
the group, and the credit of a system which included all or the 
larger part of the banks of a country like the United States would 
be the highest form of credit in the world. 

The vital difference between bank credit and individual credit 
is in the fact that bank credit is treated as cash. The banks so 
arrange the maturing obligations of their customers that they can 
agree to pay all their own obligations on demand, and they make 
good on the promise so uniformly that their promises are 
accepted as cash. Their credit, therefore, is buying power. It is 
paying power. It does everything that money can do. It is 
more liquid and transferable than money itself. When it is 
understood that the chief function of banking is dealing in credit 
and that it is credit, not money, that the b^nks lend, the old fear 
that the banks will control the volume of money and conspire to 
manipulate it for their own advantage becomes absurd. This 
old fear springs from the idea that banking consists of receiving 
and lending actual money over the counter, when in fact the 
banks lend fifty dollars of credit where they lend one of money. 
The power to issue currency does not add in the slightest degree 
to the ability of the banking system to manipulate loans. There 
is not now, and in the nature of things never can be, any physical 
obstacle to a conspiracy among the banks to manipulate loans, 
and whether they issue currency or not has nothing to do with 
the power to make or withhold loans. If there was no money in 
the country but gold coin and United States notes the banking 



SAFEGUARDS AGAINST PANICS 565 

business would go on and the money would find its way into the 
banks, and the banks would make or decline loans just as they do 
now. The power to issue currency has but one use in a banking 
system, namely to supply currency to customers when wanted; 
and there is no possible reason why it should ever refuse currency 
when they want it. It is simply one form of bank credit and the 
public frequently find it a convenient form. 

The movement pending is designed to put bank credit in the 
United States on a firmer, more trustworthy basis, than it has 
ever been before. A banking system, as we have seen, is an 
agency for organizing all of a country's available resources as a 
basis of credit. It accomplishes the seeming miracle of enabling 
capital to be in two places at the same time. In other words, it 
enables capital in one form or place to stand as a pledge for 
values or activities elsewhere, and as this agency is perfected 
and strengthened the efficiency of all our wealth-producing 
powers are correspondingly increased. 

In conclusion let it be repeated as an admonition not to be for- 
gotten for an instant that the vital factor in bank credit is its 
availability for use as money anywhere at a moment's notice. 
The banking credit of the United States can never be of the first 
class while it remains respectable for the banks to suspend pay- 
ments. And not only must they pay in lawful currency but that 
currency must be redeemable in gold and the gold reserve must 
be in sight and ample for the purpose. The authority to issue 
the currency must be vested in some organization that will have 
the power to maintain such a reserve. When our banks have a 
never-failing currency system at their command and the currency 
system has a never-failing gold reserve behind it the United 
States will come into the financial leadership which by wealth of 
resources belongs to it. 



COMPOUND INTEREST TABLE 



Giving Value of $1 at End of Any Year from 1 to 100. Can Also Be 
Employed as Table of Powers of 1.005, 1.01, 1.015, 1.03, Etc. Values for r° 



r — 1 



in n-qi 


latioii -rt. 


-"r--l 












Years 


^% 


1% 


1M% 


2% 


2K% 


3% 


3^% ^ 


^ears 


1 


1.0050 


1.0100 


1.0150 


1.0200 


1.0250 


1.0300 


1.0350 


1 


2 


1.0100 


1.0201 


1.0302 


1.0404 


1.0506 


1.0609 


1.0712 


3 


3 


1.0151 


1.0303 


1.0457 


1.0613 


1.0769 


1.0937 


1 . 1087 


3 


4 


1.0202 


1.0406 


1.0614 


1.0824 


1.1038 


1.1355 


1.1475 


4 


5 


1.0253 


1.0510 


1.0773 


1.1041 


1.1314 


1.1593 


1.1877 


5 


6 


1.0304 


1.0615 


1.0934 


1.1262 


1.1597 


1.1941 


1.2293 


6 


7 


1.0355 


1.0721 


1 . 1098 


1.1487 


1.1887 


1.3299 


1.2723 


7 


8 


1.0407 


1.0829 


1.1265 


1.1717 


1.2184 


1.2668 


1.3168 


8 


9 


1.0459 


1.0937 


1.1434 


1.1951 


1.2489 


1.3048 


1.3629 


9 


10 


1.0511 


1.1046 


1.1605 


1.2190 


1.2801 


1.3439 


1.4106 


10 


11 


1.0564 


1.1157 


1.1779 


1.2434 


1.3121 


1.3842 


1.4600 


11 


12 


1.0617 


1.1268 


1.1956 


1.2683 


1.3449 


1.4258 


1.5111 


12 


13 


1.0670 


1.1381 


1.2136 


1.3936 


1.3785 


1.4685 


1.5640 


13 


14 


1.0723 


1.1495 


1.2318 


1.3195 


1.4130 


1.5126 


1.6187 


14 


15 


1.0777 


1.1610 


1.2502 


1.3459 


1.4483 


1.5580 


1.6753 


15 


16 


1.0831 


1.1726 


1.2690 


1.3738 


1.4845 


1.6047 


1.7340 


16 


17 


1 .0885 


1.1843 


1.2880 


1.4003 


1.5316 


1.6528 


1.7947 


17 


18 


1.0939 


1.1961 


1.3073 


1.4383 


1.5597 


1.7024 


1.8575 


18 


19 


1.0994 


1.2081 


1.3270 


1.4568 


1.5987 


1.7535 


1.9225 


19 


20 


1 . 1049 


1.2202 


1.3469 


1.4859 


1.6386 


1.8061 


1.9898 


20 


21 


1.1104 


1.2324 


1.3671 


1.5157 


1.6796 


1.8603 


2.0594 


21 


22 


1.1160 


1.2447 


1.3876 


1.5460 


1.7316 


1.9161 


2.1315 


22 


23 


1.1216 


1.2572 


1.4084 


1.5769 


1.7646 


1.9736 


2.2061 


23 


24 


1.1^72 


1.2697 


1.4295 


1.6084 


1.8087 


2.0328 


2.2833 


24 


25 


1.1328 


1.2824 


1.4509 


1.6406 


1.8539 


2.0938 


2.3632 


25 


26 


1.1385 


1.2953 


1.4727 


1.6734 


1.9003 


2.1566 


2.4460 


26 


27 


1.1442 


1.3082 


1.4948 


1.7069 


1.9478 


2.2313 


2.5316 


27 


28 


1.1499 


1.3213 


1.5172 


1.7410 


1.9965 


3.3879 


2.6202 


28 


29 


1.1556 


1.3345 


1.5400 


1.7758 


3.0464 


3.3566 


2.7119 


29 


30 


1.1614 


1.3478 


1.5631 


1.8114 


3.0976 


3.4373 


2.8068 


30 


31 


1.1672 


1.3613 


1.5865 


1.8476 


3.1500 


3.5001 


2.9050 


31 


32 


1.1730 


1.3749 


1.6103 


1.8845 


3.3038 


2.5751 


3.0067 


32 


33 


1 . 1789 


1.3887 


1.6345 


1.9332 


3.3589 


2.6523 


3.1119 


33 


34 


1.1848 


1.4026 


1.6590 


1.9607 


3.3153 


2.7319 


3.3309 


34 


35 


1.1907 


1.4166 


1.6839 


1.9999 


3.3733 


2.8139 


3.3336 


35 


36 


1.1967 


1.4308 


1.7091 


2.0399 


3.4335 


2.8983 


3.4503 


36 


37 


1.2027 


1.4451 


1.7348 


2.0807 


3.4933 


2.9852 


3.5710 


37 


38 


1.2087 


1.4595 


1.7608 


2.1223 


3.5557 


3.0748 


3.6960 


38 


39 


1.2147 


1.4741 


1.7872 


2.1647 


3.6196 


3.1670 


3.8354 


39 


40 


1.2208 


1.4889 


1.8140 


2.2080 


3.6851 


3.2620 


3.9593 


40 


41 


1.2269 


1.5038 


1.8412 


3.3533 


3.7533 


3.3599 


4.0978 


41 


42 


1.2330 


1.5188 


1.8688 


3.3973 


3.8310 


3.4607 


4.3413 


42 


43 


1.2392 


1.5340 


1.8969 


3.3433 


3.8915 


3.5645 


4.3897 


43 


44 


1.2454 


1.5493 


1.9253 


3.3901 


3.9638 


3.6715 


4.5433 


44 


45 


1.2516 


1.5648 


1.9542 


3.4379 


3.0379 


3.7816 


4.7034 


45 


46 


1.2579 


1.5805 


1.9835 


3.4866 


3.1139 


3.8950 


4.8669 


46 


47 


1.2642 


1.5963 


2.0133 


3.5363 


3.1917 


4.0119 


5.0373 


47 


48 


1.2705 


1.6122 


2.0435 


2.5871 


3.3715 


4.1323 


5.3136 


48 


49 


1.2768 


1.6283 


2.0741 


2.6388 


3.3533 


4.2562 


5.3961 


49 


50 


1.2832 


1.6446 


2.1052 


2.6916 


3.4371 


4.3839 


5.5849 


50 



COMPOUND INTEREST TABLE 
I Continued) 



Years 


4% 


4K% 


5% * 


5K% 


6% 


6K% 


7% 


Years 


1 


1.0400 


1.0450 


1.0500 


1.0550 


1.0600 


1.0650 


1.0700 


1 


3 


1.0816 


1.0920 


1 . 1025 


1.1130 


1.1236^ 


1.1342 


1 . 1449 


2 


3 


1.1249 


1 . 1412 


1.1576 


1 . 1742 


1.1910 


1.2079 


1.2250 


3 


4 


1.1699 


1.1925 


1.2155 


1.2388 


1.2625 


1.2865 


1.3108 


4 


5 


1.2167 


1.2462 


1.2763 


1.8070 


1.3382 


1.3701 


1.4026 


5 


6 


1.2653 


1.3023 


1.8401 


1.8788 


1.4185 


1.4591 


1.5007 


6 


7 


1.3159 


1.3609 


1.4071 


1.4547 


1.5036 


1.5540 


1.6058 


7 


8 


1.3686 


1.4221 


1.4775 


1.5347 


1.5938 


1.6550 


1.7182 


8 


9 


1.4233 


1.4861 


1.5513 


1.6191 


1 . 6895 


1.7626 


1.8385 


9 


10 


1.4802 


1.5530 


1.6289 


1.7081 


1.7908 


1.8771 


1.9672 


10 


11 


1.5395 


1.6229 


1.7103 


1.8021 


1.8988 


1.9992 


2.1049 


11 


12 


1.6010 


1.6959 


1.7959 


1.9012 


2.0122 


2.1291 


2.2522 


12 


13 


1.6651 


1.7722 


1.8856 


2.0058 


2.1329 


2.2675 


2.4098 


13 


14 


1.7317 


1.8519 


1.9799 


2.1161 


2.2609 


2.4149 


2.5785 


14 


15 


1.8009 


1.9358 


2.0789 


2.2325 


2.3966 


2.5718 


2.7590 


15 


16 


1.8730 


2.0224 


2.1829 


2.3558 


2.5404 


2.7890 


2.9522 


16 


17 


1.9479 


2.1134 


2.2920 


2.4848 


2.6928 


2.9170 


3.1588 


17 


18 


2.0258 


2.2085 


2.4066 


2.6215 


2.8543 


3.1067 


3.3799 


18 


19 


2.1068 


2.3079 


2.5270 


2.7656 


3.0256 


3.3086 


3.6165 


19 


20 


2.1911 


2.4117 


2.6583 


2.9178 


3.2071 


3.5236 


3.8697 


20 


21 


2.2788 


2.5202 


2.7860 


8.0782 


3.3996 


3.7527 


4.1406 


21 


22 


2.3699 


2.6387 


2.9253 


3.2475 


3.6085 


3.9966 


4.4304 


22 


23 


2.4647 


2.7522 


3.0715 


3.4262 


8.8197 


4.2564 


4.7405 


23 


24 


2.5683 


2.8760 


3.2251 


3.6146 


4.0489 


4.5831 


5.0724 


24 


25 


2.6658 


3.0054 


3.3864 


3.8134 


4.2919 


4.8277 


5.4274 


25 


26 


2.7725 


3.1407 


3.5557 


4.0281 


4.5494 


5.1415 


5.8074 


26 


27 


2.8834 


3.2820 


8.7385 


4.2444 


4.8228 


5.4757 


6.2139 


27 


28 


2.9987 


8.4297 


3.9201 


4.4778 


5.1117 


5.8816 


6.6488 


28 


29 


3.1187 


3.5840 


4.1161 


4.7241 


5.4184 


6.2107 


7.1143 


29 


30 


3.2434 


3.7458 


4.8219 


4.9840 


5.7435 


6.6144 


7.6123 


30 


31 


3.3731 


3.9139 


4.5880 


5.2581 


6.0881 


7.0448 


8.1451 


81 


32 


3.5081 


4.0900 


4.7649 


5.5473 


6.4584 


7.5022 


8.7153 


32 


33 


3.6484 


4.2740 


5.0032 


5.8524 


6.8406 


, 7.9898 


9.3253 


83 


34 


8.7943 


4.4664 


5.2533 


6.1742 


7.2510 


8.5092 


9.9781 


34 


35 


8.9461 


4.6673 


5.5160 


6.5138 


7.6861 


9.0623 


10.6766 


35 


36 


4.1039 


4.8774 


5.7918 


6.8721 


8.1473 


9.6513 


11.4239 


36 


37 


4.2681 


5.0969 


6.0814 


7.2501 


8.6361 


10.2786 


12.2236 


87 


38 


4.4888 


5.3262 


6.8855 


7.6488 


9.1543 


10.9467 


13.0793 


38 


39 


4.6164 


5.5659 


6.7048 


8.0695 


9.7085 


11.6583 


13.9948 


39 


40 


4.8010 


5.8164 


7.0400 


8.5133 


10.2857 


12.4161 


14.9745 


40 


41 


4.9931 


6.0781 


7.3920 


8.9815 


10.9029 


13.2231 


16.0227 


41 


42 


5.1928 


6.8516 


7.7616 


9.4755 


11.5570 


14.0826 


17.1443 


42 


43 


5.4005 


6.6374 


8.1497 


9.9967 


12.2505 


14.9980 


18.8444 


43 


44 


5.6165 


6.9361 


8.5572 


10.5465 


12.9855 


15.9729 


19.6285 


44 


45 


5.8412 


7.2482 


8.9850 


11.1266 


13.7646 


17.0111 


21.0025 


45 


46 


6.0748 


7.5744 


9.4843 


11.7385 


14.5905 


18.1168 


22.4726 


46 


47 


6.3178 


7.9153 


9.9060 


12.3841 


15.4659 


19.2944 


24.0457 


47 


48 


6.5705 


8.2715 


10.4013 


13.0653 


16.3939 


20.5485 


25.7289 


48 


49 


6.8388 


8.6487 


10.9218 


13.7888 


17.8775 


21.8842 


27.5299 


49 


50 


7.1067 


9.0826 


11.4674 


14.5420 


18.4202 


23.3067 


29.4570 


50 



COMPOUND INTEREST TABLE 
(Continued) 



Years 


V2I0 


1% 


1K% 


2% 


2K% 


3% 


3K% 


Years 


50 


1.2832 


1.6446 


2.1052 


2.6916 


3.4371 


4.3839 


5.5849 


50 


51 


1.2896 


1.6611 


2.1368 


2.7454 


3.5230 


4.5154 


5.7804 


51 


52 


1.2961 


1.6777 


2.1689 


2.8003 


3.6111 


4.6509 


5.9827 


52 


53 


1.3026 


1.6945 


2.2014 


2.8563 


3.7014 


4.7904 


6.1921 


53 


54 


1.3091 


1.7114 


2.2344 


2.9135 


3.7939 


4.9341 


6.4088 


54 


55 


1.3156 


1.7285 


2.2679 


2.9717 


3.8888 


5.0821 


6.6331 


55 


56 


1.3222 


1.7458 


2.3020 


3.0312 


3.9860 


5.2346 


6.8653 


56 


57 


1.3288 


1.7633 


2.3365 


3.0918 


4.0856 


5.3917 


7.1056 


57 


58 


1.3355 


1.7809 


2.3715 


3.1536 


4.1878 


5.5534 


7.3543 


58 


59 


1.3421 


1.7987 


2.4071 


3.2167 


4.2925 


5.7200 


7.6117 


59 


60 


1.3489 


1.8167 


2.4432 


3.2810 


4.3998 


5.8916 


7.8781 


60 


61 


1.3556 


1.8349 


2.4799 


3.3467 


4.5098 


6.0684 


8.1538 


61 


62 


1.3624 


1.8532 


2.5171 


3.4136 


4.6225 


6.2504 


8.4392 


62 


63 


1.3692 


1.8717 


2.5548 


3.4819 


4.7381 


6.4379 


8.7346 


63 


64 


1.3760 


1.8905 


2.5931 


3.5515 


4.8565 


6.6311 


9.0403 


64 


65 


1.3829 


1.9094 


2.6320 


3.6225 


4.9780 


6.8300 


9.3567 


65 


66 


1.3898 


1.9285 


2.6715 


3.6950 


5.1024 


7.0349 


9.6842 


66 


67 


1.3968 


1.9477 


2.7116 


3.7689 


5.2300 


7.2459 


10.0231 


67 


68 


1.4038 


1.9672 


2.7523 


3.8443 


5.3607 


7.4633 


10.3739 


68 


69 


1.4108 


1.9869 


2.7936 


3.9211 


5.4947 


7.6872 


10.7370 


69 


70 


1.4178 


2.0068 


2.8355 


3.9996 


5.632L 


7.9178 


11.1128 


70 


71 


1.4249 


2.0268 


2.8780 


4.0795 


5.7729 


8.1554 


11.5018 


71 


72 


1.4320 


2.0471 


2.9212 


4.1611 


5.9172 


8.4000 


11.9043 


72 


73 


1.4392 


2.0676 


2.9650 


4.2444 


6.0652 


8.6520 


12.3210 


73 


74 


1.4464 


2.0882 


3.0094 


4.3293 


6.2168 


8.9116 


12.7522 


74 


75 


1.4536 


2.1091 


3.0546 


4.4158 


6.3722 


9.1789 


13.1986 


75 


76 


1.4609 


2.1302 


3.1004 


4.5042 


6.5315 


9.4543 


13.6605 


76 


77 


1.4682 


2.1515 


3.1469 


4.5942 


6.6948 


9.7379 


14.1386 


77 


78 


1.4755 


2.1730 


3.1941 


4.6861 


6.8622 


10.0301 


14.6335 


78 


79 


1.4829 


2.1948 


3.2420 


4.7798 


7.0337 


10.3310 


15.1456 


79 


80 


1.4903 


2.2167 


3.2907 


4.8754 


7.2096 


10.6409 


15.6757 


80 


81 


1.4978 


2.2389 


3.3400 


4.9729 


7.3898 


10.9601 


16.2244 


81 


82 


1.5053 


2.2613 


3.3901 


5.0724 


7.5746 


11.2889 


16.7922 


82 


83 


1.5128 


2.2839 


3.4410 


5.1739 


7.7639 


11.6276 


17.3800 


83 


84 


1.5204 


2.3067 


3.4926 


5.2773 


7.9580 


11.9764 


17.9883 


84 


85 


1.5280 


2.3298 


3.5450 


5.3829 


8.1570 


12.3357 


18.6179 


85 


86 


1.5356 


2.3531 


3.5982 


5.4905 


8.3609 


12.7058 


19.2695 


86 


87 


1.5433 


2.3766 


3.6521 


5.6003 


8.5699 


13.0870 


19.9439 


87 


88 


1.5510 


2.4004 


3.7069 


5.7124 


8.7842 


13.4796 


20.6420 


88 


89 


1.5588 


2.4244 


3.7625 


5.8266 


9.0038 


13.8839 


21.3644 


89 


90 


1.5666 


2.4486 


3.8189 


5.9431 


9.2289 


14.3005 


22.1122 


90 


91 


1.5744 


2.4731 


3.8762 


6.0620 


9.4596 


14.7295 


22.8861 


91 


92 


1.5823 


2.4979 


3.9344 


6.1832 


9.6961 


15.1714 


23.6871 


92 


93 


1.5902 


2.5228 


3.9934 


6.3069 


9.9385 


15.6265 


24.5162 


93 


94 


1.5981 


2.5481 


4.0533 


6.4330 


10.1869 


16.0953 


25.3742 


94 


95 


1.6061 


2.5735 


4.1141 


6.5617 


10.4416 


16.5782 


26.2623 


95 


96 


1.6141 


2.5993 


4.1758 


6.6929 


10.7026 


17.0755 


27.1815 


96 


97 


1.6222 


2.6253 


4.2384 


6.8268 


10.9702 


17.5878 


28.1329 


97 


98 


1.6303 


2.6515 


4.3020 


6.9633 


11.2445 


18.1154 


29.1175 


98 


99 


1.6385 


2.6780 


4.3665 


7.1026 


11.5256 


18.6589 


30.1366 


99 


100 


1 . 6467 


2.7048 


4.4320 


7.2446 


11.8137 


19.2186 


31.1914 


100 



COMPOUND INTEREST TABLE 
(Continued) 



Years 


4% 


4K% 


5% 


5K% 


6% 


6^% 


r% 


Years 


50 


7.1067 


9.0326 


11.4674 


14.5420 


18.4202 


23.3067 


29.4570 


50 


51 


7.3910 


9.4391 


12.0408 


15.3418 


19.5254 


24.8216 


31.5190 


51 


52 


7.6866 


9.8639 


12.6428 


16.1856 


20.6969 


26.4350 


33.7253 


52 


53 


7.9941 


10.3077 


13.2749 


17.0758 


21.9387 


28.1533 


36.0861 


53 


54 


8.3138 


10.7716 


13.9387 


18.0149 


23.2550 


29.9833 


38.6122 


54 


55 


8.6464 


11.2563 


14.6356 


19.0058 


24.6503 


31.9322 


41.3150 


55 


56 


8.9922 


11.7628 


15.3674 


20.0511 


26.1293 


34.0078 


44.2071 


56 


57 


9.3519 


12.2922 


16.1358 


21.1539 


27.6971 


36.2183 


47.3015 


57 


58 


9.7260 


12.8453 


16.9426 


22.3174 


29.3589 


38.5725 


50.6127 


58 


59 


10.1150 


13.4234 


17.7897 


23.5448 


31 . 1205 


41.0797 


54.1555 


59 


60 


10.5196 


14.0274 


18.6792 


24.8398 


32.9877 


43.7498 


57.9464 


60 


61 


10.9404 


14.6586 


19.6131 


26.2060 


34.9670 


46.5936 


62.0027 


61 


62 


11.3780 


15.3183 


20.5938 


27.6473 


37.0650 


49.6222 


66.3429 


62 


63 


11.8332 


16.0076 


21.6235 


29.1679 


39.2889 


52.8476 


70.9869 


63 


64 


12.3065 


16.7279 


22.7047 


30.7721 


41 . 6462 


56.2827 


75.9559 


64 


65 


12.7987 


17.4807 


23.8399 


32.4646 


44.1450 


59.9411 


81.2729 


65 


66 


13.3107 


18.2673 


25.0319 


34.2501 


46.7937 


63.8372 


86.9620 


66 


67 


13.8431 


19.0894 


26.2835 


36.1339 


49.6013 


67.9867 


93.0493 


67 


68 


14.3968 


19.9484 


27.5977 


38.1213 


52.5774 


72.4058 


99.5627 


68 


69 


14.9727 


20.8461 


28.9775 


40.2179 


55.7320 


77.1122 


106.5321 


69 


70 


15.5716 


21.7841 


30.4264 


42.4299 


59.0759 


82.1245 


113.9894 


70 


71 


16.1945 


22.7644 


31.9477 


44.7636 


62.6205 


87.4626 


121.9686 


71 


72 


16.8423 


23.7888 


33.5451 


47.2256 


66.3777 


93.1476 


130.5065 


72 


73 


17.5160 


24.8593 


35.2224 


49.8230 


70.3604 


99.2022 


139.6419 


73 


74 


18.2166 


25.9780 


36.9835 


52.5632 


74.5820 


105.6504 


149.4168 


74 


75 


18.9453 


27.1470 


38.8327 


55.4542 


79.0569 


112.5176 


159.8760 


75 


76 


19.7031 


28.3686 


40.7743 


58.5042 


83.8003 


119.8313 


171.0673 


76 


77 


20.4912 


29.6452 


42.8130 


61.7219 


88.8284 


127.6203 


183.0421 


77 


78 


21.3108 


30.9792 


44.9537 


65.1166 


94.1581 


135.9156 


195.8550 


78 


79 


22.1633 


32.3733 


47.2014 


68.6980 


99.8075 


144.7501 


209.5648 


79 


80 


23.0498 


33.8301 


49.5614 


72.4764 


105.7960 


154.1589 


224.2344 


80 


81 


23.9718 


35.3525 


52.0395 


76.4626 


112.1438 


164.1792 


239.9308 


81 


82 


24.9307 


36.9433 


54.6415 


80.6681 


118.8724 


174.8509 


256.7260 


82 


83 


25.9279 


38.6058 


57.3736 


85.1048 


126.0047 


186.2162 


274.6968 


83 


84 


26.9650 


40.3430 


60.2422 


89.7856 


133.5650 


198.3202 


293.9255 


84 


85 


28.0436 


42.1585 


63.2544 


94.7238 


141.5789 


211.2111 


314.5003 


85 


86 


29.1653 


44.0556 


66.4171 


99.9336 


150.0736 


224.9398 


336.5154 


86 


87 


30.3320 


46.0381 


69.7379 


105.4299 


159.0781 


239.5609 


360.0714 


87 


88 


31.5452 


48.1098 


73.2248 


111.2286 


168.6227 


255.1323 


385.2764 


88 


89 


32.8071 


50.2747 


76.8861 


117.3462 


178.7401 


271.7159 


412.2458 


89 


90 


34.1193 


52.5371 


80.7304 


123.8002 


189.4645 


289.3775 


441 . 1030 


90 


91 


35.4841 


54.9013 


84.7669 


130.6092 


200.8324 


308.1870 


471.9802 


91 


92 


36.9035 


57.3718 


89.0052 


137.7927 


212.8823 


328.2191 


505.0188 


92 


93 


38.3796 


59.9536 


93.4555 


145.3713 


225.6553 


349.5534 


540.3701 


93 


94 


39.9148 


62.6515 


98.1283 


153.3667 


239.1946 


372.2744 


578.1960 


94 


95 


41.5114 


65.4708 


103.0347 


161.8019 


253.5463 


396.4722 


618.6697 


95 


96 


43.1718 


68.4170 


108.1864 


170.7010 


268.7590 


422.2429 


661.9766 


96 


97 


44.8987 


71.4957 


113.5957 


180.0896 


284.8846 


449.6887 


708.3150 


97 


98 


46.6947 


74.7130 


119.2755 


189.9945 


301 , 9776 


478.9184 


757.8970 


98 


99 


48.5625 


78.0751 


125.2393 


200.4442 


320.0963 


510.0481 


810.9498 


99 


100 


50.5049 


81.5885 


131.5013 


211.4686 


339.3021 


543.2013 


867.7163 


100 



ANNUITY TABLE 

Giving Yearly Payments Required to Redeem $100 (per cent. ) at End 
of any Year from 1 to 100. Per cent. Values for A in Equation A=S — 



Years 


2M% 


3% 


^%1o 


4% 


4>^% 


5% 


6% 


Years 


1 


100.00 


100.00 


100.00 


100.00 


100.00 


100.00 


100.00 


1 


2 


49.38 


49.26 


49.14 


49.02 


48.90 


48.78 


48.54 


2 


3 


32.51 


32.86 


32.19 


32.03 


31.88 


81.72 


31.41 


3 


4 


24.08 


23.90 


28.73 


23.55 


23.87 


23.20 


22,86 


4 


5 


19.02 


18.84 


18.65 


18.46 


18.28 


18.10 


17.74 


5 


6 


15.65 


15.46 


15.27 


15.08 


14.89 


14.70 


14.84 


6 


7 


13.25 


13.05 


12.85 


12.66 


12.47 


12.28 


11.91 


7 


8 


11.45 


11.25 


11.05 


10.85 


10.66 


10.47 


10.10 


8 


9 


10.05 


9.84 


9.64 


9.45 


9.26 


9.07 


8.70 


9 


10 


8.93 


8.72 


8.52 


8.38 


8.14 


7.95 


7.59 


10 


11 


8.01 


7.81 


7.61 


7.42 


7.23 


7.04 


6.68 


11 


13 


7.25 


7.05 


6.85 


6.66 


6.47 


6.28 


5.98 


12 


13 


6.60 


6.40 


6.21 


6.01 


5.83 


5.65 


5.30 


13 


14 


6.05 


5.85 


5.66 


5.47 


5.28 


5.10 


4.76 


14 


15 


5.58 


5.88 


5.18 


4.99 


4.81 


4.68 


4.30 


15 


16 


5.16 


4.96 


4.77 


4.58 


4.40 


4.23 


3.90 


16 


17 


4.79 


4.60 


4.40 


4.22 


4.04 


3.87 


3.54 


17 


18 


4.47 


4.27 


4.08 


3.90 


8.72 


3.55 


8.24 


18 


19 


4.18 


8.98 


8.79 


3.61 


3.44 


8.27 


2.96 


19 


20 


3.91 


3.72 


8.54 


3.36 


8.19 


8.02 


2.72 


20 


21 


3.68 


3.49 


3.30 


3.13 


2.96 


2.80 


2.50 


21 


22 


3.46 


3.27 


3.09 


2.92 


2.75 


2.60 


2.80 


22 


23 


3.27 


3.08 


2.90 


2.73 


2.57 


2.41 


2.13 


23 


24 


3.09 


2.90 


2.73 


2.56 


2.40 


2.25 


1.97 


24 


25 


2.93 


2.74 


2.57 


2.40 


2.24 


2.10 


1.82 


25 


26 


2.78 


2.59 


2.42 


2.26 


2.10 


1.96 


1.69 


26 


27 


2.64 


2.46 


2.29 


2.12 


1.97 


1.83 


1.57 


27 


28 


2.51 


2.83 


2.16 


2.00 


1.85 


1.71 


1.46 


28 


29 


2.39 


2.21 


2.04 


1.89 


1.74 


1.60 


1.86 


29 


30 


2.28 


2.10 


1.94 


1.78 


1.64 


1.51 


1.26 


30 


31 


2.17 


2.00 


1.84 


1.69 


1.54 


1.41 


1.18 


31 


32 


2.08 


1.90 


1.74 


1.60 


1.46 


1.33 


1.10 


82 


38 


1.99 


1.82 


1.66 


1.51 


1.37 


1.25 


1.03 


83 


34 


1.90 


1.73 


1.58 


1.43 


1.30 


1.18 


0.96 


84 


35 


1.82 


1.65 


1.50 


1.86 


1.23 


1.11 


.90 


35 


36 


1.75 


1.58 


1.43 


1.29 


1.16 


1.04 


.84 


36 


37 


1.67 


1.51 


1.86 


1.22 


1.10 


0.98 


.79 


37 


38 


1.61 


1.45 


1.30 


1.16 


1.04 


.93 


.74 


88 


39 


1.54 


1.38 


1.24 


1.11 


0.99 


.88 


.69 


39 


40 


1.48 


1.33 


1.18 


1.05 


.93 


.83 


.65 


40 


41 


1.43 


1.27 


1.18 


1.00 


.89 


.78 


.61 


41 


42 


1.37 


1.22 


1.08 


0.95 


.84 


.74 


.57 


42 


43 


1.32 


1.17 


1.03 


.91 


.80 


.70 


.53 


43 


44 


1.27 


1.12 


0.99 


.87 


.76 


.66 


.50 


44 


45 


1.23 


1.08 


.95 


.88 


.72 


.68 


.47 


45 


46 


1.18 


1.04 


.91 


.79 


.68 


.59 


.44 


46 


47 


1.14 


1.00 


.87 


.75 


.65 


.56 


.41 


47 


48 


1.10 


0.96 


.83 


.72 


.62 


.58 


.39 


48 


49 


1.06 


.92 


.80 


.69 


.59 


.50 


.37 


49 


50 


1.03 


.89 


.76 


.66 


.56 


.48 


.34 


50 



ANNUITY TABLE 
(Continued) 



Years 


2^% 


3% 


3K% 


4% 


4>^% 


5% 


6% 


Years 


50 


1.03 


.89 


.76 


.66 


.56 


.48 


.34 


50 


51 


0.99 


.85 


.73 


.63 


.53 


.45 


.32 


51 


52 


.96 


.82 


.70 


.60 


.51 


.43 


.30 


52 


53 


.93 


.79 


.67 


.57 


.48 


.41 


.29 


53 


54 


.89 


.76 


.65 


.55 


.46 


.39 


.27 


54 


55 


.87 


.73 


.62 


.52 


.44 


.37 


.25 


55 


56 


.84 


.71 


.60 


.50 


.42 


.35 


.24 


56 


57 


.81 


.68 


.57 


.48 


.40 


.33 


.22 


57 


58 


.78 


.66 


.55 


.46 


.38 


.31 


.21 


58 


59 


.76 


.64 


.53 


.44 


.36 


.30 


.20 


59 


60 


.74 


.61 


.51 


.42 


.35 


.28 


.19 


60 


61 


.71 


.59 


.49 


.40 


.33 


.27 


.18 


61 


62 


.69 


.57 


.47 


.39 


.31 


.26 


.17 


62 


63 


.67 


.55 


.45 


.37 


.30 


.24 


.16 


63 


64 


.65 


.53 


.44 


.35 


.29 


.23 


.15 


64 


65 


.63 


.51 


.42 


.34 


.27 


.22 


.14 


65 


66 


.61 


.50 


.40 


.32 


.26 


.21 


.13 


66 


67 


.59 


.48 


.39 


.31 


.25 


.20 


.12 


67 


68 


.57 


.46 


.37 


.30 


.24 


.19 


.12 


68 


69 


.56 


.45 


.36 


.29 


.23 


.18 


.11 


69 


70 


.54 


.43 


.35 


.27 


.22 


.17 


.10 


70 


71 


.52 


.42 


.33 


.26 


.21 


.16 


.10 


71 


72 


.51 


.41 


.32 


.25 


.20 


.15 


.09 


72 


73 


.49 


.39 


.31 


.24 


.19 


.15 


.09 


73 


74 


.48 


.38 


.30 


.23 


' .18 


.14 


.08 


74 


75 


.47 


.37 


.29 


.22 


.17 


.13 


.08 


75 


76 


.45 


.35 


.28 


.21 


.16 


.13 


.07 


76 


77 


.44 


.34 


.27 


.21 


.16 


.12 


.07 


77 


78 


.43 


.33 


.26 


.20 


.15 


.11 


.06 


78 


79 


.41 


.32 


25 


.19 


.14 


.11 


.06 


79 


80 


.40 


.31 


.24 


.18 


.14 


.10 


.06 


80 


81 


.39 


.30 


.23 


.17 


.13 


.10 


.05 


81 


82 


.38 


.29 


.22 


.17 


.13 


.09 


.05 


• 82 


83 


.37 


.28 


.21 


.16 


.12 


.09 


.05 


83 


84 


.36 


.27 


.21 


.15 


.11 


.08 


.05 


84 


85 


.35 


.26 


.20 


.15 


.11 


.08 


.04 


85 


86 


.34 


.26 


.19 


.14 


.10 


.08 


.04 


86 


87 


.33 


.25 


.18 


.14 


.10 


.07 


.04 


87 


88 


.32 


.24 


.18 


.13 


.10 


.07 


.04 


88 


89 


.31 


.23 


.17 


.13 


.09 


.07 


.03 


89 


90 


.30 


.23 


.17 


.12 


.09 


.06 


.03 


90 


91 


.30 


.22 


.16 


.12 


.08 


.06 


.03 


91 


92 


.29 


.21 


.15 


.11 


.08 


.06 


.03 


92 


93 


.28 


.21 


.15 


.11 


.08 


.05 


.03 


93 


94 


.27 


.20 


.14 


.10 


.07 


.05 


.03 


94 


95 


.26 


.19 


.14 


.10 


.07 


.05 


.02 


95 


96 


.26 


.19 


.13 


.09 


.07 


.05 


.02 


96 


97 


.25 


.18 


.13 


.09 


.06 


.04 


.02 


97 


98 


.24 


.18 


.12 


.09 


.06 


.04 


.02 


98 


99 


.24 


.17 


.12 


.08 


.06 


.04 


.02 


99 


100 


.23 


.16 


.12 


.08 


.06 


.04 


.02 


100 




6 10 16 2n 



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